(A) "In an economy ex-ante investment (I) is less than ex-post savings (S)." Explain the likely impact of the given situation on output, employment and income. (B) Define deficient demand.

Question

Accepted Answer

(A) **When ex-ante investment (I) < ex-post savings (S):**
- This indicates **deficient demand** in the economy
- Planned expenditure falls short of planned output
- Firms experience unplanned inventory accumulation
- **Impact on output:** Firms cut production, leading to fall in output
- **Impact on employment:** Reduced production leads to job losses
- **Impact on income:** Fall in output reduces factor incomes, decreasing national income
- The economy moves away from equilibrium until savings equal investment at a lower level of income

(B) **Deficient Demand** is the situation when aggregate demand falls short of aggregate supply at full employment level. It leads to fall in output, income and employment, causing unemployment in the economy.