If policymakers in an open economy want to increase the wealth of their citizens, should they seek to increase saving, or to increase investment? Explain
What will be an ideal response?
Policies to increase investment will increase the domestic capital stock. However, this adds nothing to citizens' wealth, unless saving has increased. If saving is fixed, the increase in investment is financed either by foreigners (net capital inflow) or by a diversion of domestic saving from foreign assets to domestic assets (reduced net capital outflow). Policies to increase saving, if effective, will increase domestic wealth, regardless of the level of domestic investment.
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