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Question
If planned savings exceeds planned investments in an economy, explain its likely impact on income, output and employment.
Solution
If expressed savings surpass planned investment, or if S > I, this indicates that aggregate supply exceeds aggregate demand (AS > AD).
AS > AD
C + S > C + I
OR S > I
Effect on output: With a reduction in aggregate demand, families and businesses prefer to save more of their incomes, resulting in unsold items at producers, and manufacturers will intend to reduce production to clear the stocks.
Effect on Employment: The plan to lower output will result in a decrease in the country's employment level.
Effect on Income: Employee layoffs will result in a drop in the country's income level.
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