Final answer:
When the propensity to save grows, the equilibrium interest rate decreases. This is because there is now more financial capital available, which reduces the cost of borrowing.
Step-by-step explanation:
The equilibrium interest rate refers to the interest rate at which the quantity of financial capital demanded equals the quantity of financial capital supplied. When the propensity to save grows, it means that individuals and businesses are saving a larger portion of their income and reducing their spending. This increase in saving leads to an increase in the supply of financial capital in the market. As a result, the supply curve for financial capital shifts to the right.
With the increase in supply, the equilibrium interest rate decreases. This is because there is now more financial capital available, which reduces the cost of borrowing. The increased saving also indicates a reduced demand for borrowing, further contributing to the decrease in the equilibrium interest rate.
For example, let's say the original equilibrium interest rate is 5% and the propensity to save increases. As a result, the supply of financial capital increases and the equilibrium shifts to a new point where the interest rate decreases to 4%. This decrease in the equilibrium interest rate incentivizes increased borrowing and investment, which can stimulate economic growth.