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Question
“In an economy Planned spending is more than Planned output”.
Explain its impact on the level of output, income and employment.
Solution
If planned expenditure exceeds anticipated output in an economy, it suggests that ex-ante aggregate demand exceeds ex-ante aggregate supply (AD > AS).
Planned Output indicates planned aggregate supply, whereas Planned Spending represents planned aggregate expenditure.
- Effect on output: Producers will expand production to fulfill the rising demand in the economy. As a result, the economy's output will rise.
- Effect on Employment: Producers will use more resources (labor) to increase production. As a result, the economy's employment will grow.
- Effect on Income: Increased employment will result in more job opportunities. It will raise the level of income in the economy.
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