Basic economic growth question

[Symplectic manifold]

Imagine a simplistic economy with homogeneous firms and households. Suppose that there is an exogenous positive saving rate shock, S1>S0. The households lend their extra savings to firms who make an investment and build more capital which allows firms to produce more real GDP. The firms then go to the respective product markets and put that extra GDP on display. In order for firms to pay higher wages to employees and to pay back the principal plus interest to lenders, they need to sell that extra GDP to households. Where do households get extra money to buy that extra gdp if they already are spending all of their income on existing goods and services after invested savings.

In my existing understanding, the money supply has to increase through a multiple deposit expansion mechanism. But if this is correct then it’s just banks expanding credit following an increase in a monetary base. And credit isn’t a freebie, people have to return what they borrowed from the bank with interest. Which brings us to roughly the same place where we started, where would households get money to pay the interest?

[dream_weaver]

Suppositions and if/then's. What you have written reads like a story problem from an economics course.

Only surplus production (a form of savings) can be used as investment which can, in turn, make further surplus production (potentially more savings) or new ventures (potentially new forms of savings) possible. Money devised without this mind may have systemic issues of its own.

 

 

[SpookyKitty]

My understanding of how the banking system works is pretty weak, but I'll take a stab at it. Households get the money to pay the interest from increased wages. The money needed for this is created when firms take out bigger loans.