A reduction in military spending moves the government’s budget from deficit
into surplus. Use supply demand analysis to predict the resulting changes in the real interest rate, national savings and investment.
Increased public saving raises national saving. The supply of saving (S) curve shifts right. The real interest rate falls, national saving and investment rise. Can someone explain to me why does real interest rate falls in this scenario? If national savings increase, shouldn’t the interest rate increase due to incentive to save from the surplus?
