In a closed economy, what is the relationship between saving and investment?

In a closed economy, saving and investment are indeed always equal. This fundamental principle arises from the identity of national income accounting, where in a closed economy, total output (or GDP) must equal the total amount of spending.

When we break this down, we find that in such an economy, all income generated must either be consumed or saved. Therefore, the total amount that households and businesses save (total savings) must be equal to the total amount of investment that occurs in the economy. This equality can be formally expressed using the equation:

Savings = Investment

This relationship is essential for understanding how economic growth is financed through saving, leading to investment in capital goods. In a closed economy, every dollar saved contributes directly to investments, as there are no capital inflows from abroad to alter this balance.

In other options, scenarios are presented that do not align with this established relationship in a closed economy. For instance, stating that savings exceed investments or vice versa would imply a mismatch that wouldn't hold true in a closed system where the flow of funds among the components is tightly linked. Additionally, it’s incorrect to say that savings lead to increased taxation since those are independent concepts in economic theories.