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Discuss the working of the adjustment mechanism in the following situations:
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Question : 13
Total: 19
Ex-Ante Investment are lesser than Ex-Ante Savings.
Solution:
Ex-Ante Investments are lesser than ExAnte Savings :
When planned savings are more than planned investment, it means that household are not consuming as much as firms expected them to do so. This will lead to build up of undesired inventory. To clear the undesired rise in inventory, firms reduces its production, which also means fall in income and hence saving reduces till planned savings and planned investments are equal.
When planned savings are more than planned investment, it means that household are not consuming as much as firms expected them to do so. This will lead to build up of undesired inventory. To clear the undesired rise in inventory, firms reduces its production, which also means fall in income and hence saving reduces till planned savings and planned investments are equal.
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