CBSE 2020 Class 12 Economics Delhi Set 1

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Discuss the working of the adjustment mechanism in the following situations :
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Question : 23
Total: 46
If Ex-Ante Investments are less than ExAnte Savings.
Solution:  
When S exceeds i.e., when withdrawal from the income is greater than injections into the circular flow of income, then it implies that total consumption expenditure is less than what is required to purchase the available supply of goods and services. In other words, we can understand this as high saving implies low consumption, which means that the required output is less than the planned output. Thus, a portion of the supply remains unsold, which leads to unplanned inventory accumulation. In response to this situation, for clearing this unsold stock, the producers plan a cut in the production in the next period. Therefore reduce the employment of labourers. The reduced employment leads to fall in aggregate income in the economy consequently, lesser aggregate saving. The saving will continue to fall, until, it becomes equal consequently, lessor aggregate saving. The saving will continue to fall, until it becomes equal to the investment. At a point, where saving and investment are equal, equilibrium is achieved.
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