Saving supplies funds, investment demands them, the real interest rate clears the market.
Warming up the engine…
The market where saving (supply of funds) meets investment demand (borrowing), with the real interest rate as the price that clears it.
S(r) = I(r) at equilibrium real interest rate r*
Higher rates reward savers but punish borrowers, so the rate settles where the two plans match. A government deficit borrows from the same pool, shifting demand for funds right and raising rates, which squeezes out some private investment: crowding out in one picture.
Label the axis as the REAL interest rate. Crowding out questions want the mechanism spelled out: deficit raises r, higher r reduces private I.
Now prove you have it
Move the curve to where you think it lands, and get told exactly which part you got right.
Real-world scenarios on this model
Equilibrium at Q 50, r 5.0.
Equilibrium: Q* = 50.0, r* = 5.0
Current equations
Where interest rates come from. Savers supply funds (more when rates are high); investors demand them for projects (more when rates are low). The realrealAdjusted for inflation, measured in actual purchasing power. interest rate is the price that balances the two. More saving means cheaper borrowing; an investment boom bids rates up.