Introduction
The need to know the relationship that exists between spending, investments and savings is of great importance to any economy since it helps to come up with various economic policies that are used to control the economy. The aspects of how various financial institutions operate to match the needs of savers and borrowers is also essential since it helps to determine the circulation of money in the economy and methods used to stabilize the economy. Savings, spending and investments are all related and some economic concepts and graphs are used to show the interrelationship that exists between the three terms.
Summary of the article
The article basically shows how economic growth and development is influenced by savings, spending and investments. The money cycle can be seen to start when an individual earns and should decide on whether to spend, save or invest the money. The decision is usually based on the needs of the individual and each of the decision that is made has an impact to the economy. The individual might decide to borrow funds from a financial institution and refund it at a given rate of interest and over a given period.
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The funds borrowed are usually the savings made buy those with excess money at their disposal or those willing to save for their future needs. There is always a need to match savings and spending on investments and the basic rule is that savings and investment spending are always equal (Krugman, 2009) . Macroeconomists use the term investment spending to mean spending on new tangible capital but the important thing to know is that only spending that will add new physical capital is referred to as investment spending.
Discussion
Loanable funds market helps us know the savings are allocated to eligible borrowers with projects that need financing. A project needs to have a higher rate of return than the equilibrium rate of interest for it to be funded. The financial markets get their profit from the different rates offered to both the borrower and the saver. Crowding effect occurs when the government or lenders, raises their lending rates because of budget deficits which shifts the demand curves for government borrowing to the left (Mateer, 2014) .
The rate of inflation changes with time and this forces the financial institutions to offer nominal rates of interests instead of real rates of interests. Fisher effect shows that an increase in the inflation rate of a given country causes an increase in the nominal rates of interest such that the real rates of interests are almost unchanged. Financial institutions that deals with pension funds, insurance, mutual funds and banks are the critical components that makes up the financial system which regulates the saving, spending and investments in each economy (Krugman, 2009) .
Graphical Analysis
Figure 1 shows how the equilibrium in the loanable funds market is achieved. The rates of return of the project is the key determinant of whether a loan is to be granted. The graph below shows that any project that has a rate of return that is lower than the offered rate on borrowed funds will not be accepted hence no financing. A project that has a return higher than the offered rate on loans will always be funded since it is a guarantee that the project can repay the loan on time (Krugman, 2009) .
Figure 1; source (Krugman, 2009)
However, this is a disadvantage to projects that have lower rates of return during the first few years or months which implies that even if the project has excellent returns in the future, it might fail to be implemented because of lack of funds. This might lead to slow rate of economic growth and development because of failure to implement such projects.
References
Krugman, W. (2009). Savings, spending and investment in the financial System. New York: Worth Publishers.
Mateer, D. (2014). Principles of Economics : Macroeconomic Basics. New York: Norton & Company Publishers.
