Although the United States is one of the richest nations in the world, it is also the world's largest debtor nation. We often hear that the problem is the nation's low savings rate. Suppose policy makers attempt to rectify this by encouraging greater savings in the economy. What effect will their successful attempts have on real GDP?

Savings refer to the portion of income that is not spent on consumption, while investment refers to the expenditure made on capital goods, such as machinery, tools, and buildings. Real GDP, on the other hand, is a measure of the total output of goods and services produced within an economy, adjusted for price changes and inflation.

Higher savings result in more funds being available for investment. This increased investment can lead to higher economic growth by enhancing the productive capacity of an economy. More investment in capital goods leads to increased production and higher real GDP.

The loanable funds market is where savers (households) provide funds to borrowers (firms) for investment purposes. An increase in savings shifts the supply curve of the loanable funds market to the right, resulting in a lower interest rate. Lower interest rates make borrowing cheaper, encouraging firms to invest more in capital goods.

With more savings, the loanable funds market experiences an increase in the supply of funds, leading to lower interest rates. This decrease in interest rates encourages firms to increase their investments in capital goods. As the capital stock of an economy increases, so does its productive capacity, leading to higher real GDP. Therefore, successful attempts to encourage greater savings in the United States would likely increase the real GDP. In conclusion, an increase in the savings rate has the potential to positively affect the real GDP of the United States. This would occur through the loanable funds market mechanism, which would lead to lower interest rates and stimulate investment in capital goods, ultimately boosting economic growth.