What adjusts to bring saving and investment into balance?

In macroeconomic theory, saving and investment are closely related through the market for loanable funds. The interest rate plays a crucial role in this relationship because it serves as the price of borrowing money. When individuals save, they deposit their funds in banks and financial institutions, which then lend those funds to borrowers for investment purposes.

When there is an imbalance between saving and investment, the interest rate adjusts to restore equilibrium. If saving outpaces investment, the surplus of funds available for loans leads to a decrease in the interest rate. A lower interest rate encourages more borrowing for investment and simultaneously discourages saving since the return on savings diminishes. Conversely, if investment exceeds savings, the competition for loanable funds increases, driving up the interest rate. Higher interest rates encourage saving as individuals seek better returns, while they deter borrowing due to the higher cost, thus bringing balance back to the market.

Other choices, while related to the broader economic context, do not directly adjust to equalize saving and investment as effectively as the interest rate does. Government spending can influence demand and hence investment but does not directly balance saving. The supply of loanable funds is impacted by saving and investment but does not operate as the mechanism for adjustment. Inflation affects the purchasing power of money but