Question

In light of the fact that a fall in real net wealth during a recession causes real saving to increase, does the saving function shift upward or downward when real net wealth decreases? Explain your reasoning.

Short answer

The investment function would shift up or down in response to changes in factors such as technology opportunities, expectations for near-term economic growth, and interest rates.

Step-by-step solution

Causes of Saving function to Shift downwards.

In general, anything other than disposable income that effects consumption or savings will cause the Functions to go upward or downward. Any change in disposable income will cause you to progress through the Functions.

During a recession, real income falls.

A recession is defined as a sustained reduction in economic activity lasting more than a few months. All five economic indicators have decreased: real gross national product, income, employment, manufacturing, and retail trade.