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To save or to consume: linking growth theory with the Keynesian Model

posted on 2006-01-01, 00:00 authored by Y-K Kwok
In the neoclassical growth theory, higher saving rate gives rise to higher
output per capita. However, in the Keynesian model, higher saving rate causes lower consumption, which may lead to a recession. Students may ask, “Should we save or should we consume?” In most of the macroeconomics textbooks, economic growth and Keynesian economics are taught in separate, sometimes unsequential, chapters. The connection between the short run and the long run is not apparent. The author builds a bridge between the neoclassical growth theory and the Keynesian model. He links the Solow diagram and the IS-LM curves and depicts the short-run to long-run transition of the economy after changes in saving and other macroeconomic policies.



School Working Paper - Economic Series 2007 ; 2006/28


1 - 14


Deakin University, School of Accounting, Economics and Finance

Place of publication

Geelong, Vic.



Publication classification

CN.1 Other journal article

Copyright notice

2006, The Authors