INTERLINKAGES OF INVESTMENT, CONSUMPTION, AND SAVING IN DETERMINING SHORT-RUN EQUILIBRIUM: AN AGGREGATE DEMAND (AD) – AGGREGATE SUPPLY (AS) FRAMEWORK

Abstract

This paper examines the interlinkages of investment, consumption, and saving in determining short-run equilibrium within the Aggregate Demand–Aggregate Supply (AD–AS) framework. Using a synthesis of Keynesian, neoclassical, and New-Keynesian perspectives, the study emphasizes the dynamic feedback loops among these three macroeconomic variables and their implications for output, income, and employment. Consumption is identified as the largest and most stable component of aggregate demand, with its fluctuations deeply influenced by liquidity constraints, precautionary saving behavior, and consumer confidence. Investment, in contrast, is the most volatile component, driven largely by expectations, profitability, and financial conditions. Saving, while essential for long-term capital accumulation, demonstrates a paradoxical short-run role, often dampening demand and reinforcing downturns. The findings highlight that short-run equilibrium is a result of the simultaneous interaction of these forces rather than the dominance of one variable. Consumption generates immediate demand; investment amplifies growth through multiplier and accelerator effects; and saving, although restraining in the short run, provides the resources for future growth. Policy interventions, particularly fiscal and monetary measures, play a critical role in mediating these interactions and restoring equilibrium during crises. The paper concludes that understanding these interdependencies is crucial for designing effective macroeconomic policies that balance short-term stability with long-term growth objectives.