If planned savings exceed planned investments in an economy, state its likely impact on output and employment. If planned savings fall short of planned investments in an economy, state its likely impact on output and employment.

Question

Accepted Answer

Case 1: When planned savings exceed planned investments (S > I):
- Households consume less and save more than firms expected.
- This leads to unplanned inventory accumulation (unsold goods pile up).
- Firms reduce production to clear excess stock.
- Reduced production leads to lower employment and output.
- Income falls, which reduces savings.
- Process continues until S = I.
- Impact: Output decreases, employment falls, income declines.

Case 2: When planned savings fall short of planned investments (S < I):
- Households consume more and save less than firms expected.
- This leads to unplanned inventory depletion (goods sell faster than expected).
- Firms increase production to meet excess demand.
- Increased production leads to higher employment and output.
- Income rises, which increases savings.
- Process continues until S = I.
- Impact: Output increases, employment rises, income grows.