Question

In an economy planned spending is greater than planned output. Explain all the changes that will take place in the economy.

Answer 1

If planned spending is greater than the planned output, it denotes that AD is more than AS, then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output. More output means more income. Rise in output means rise in AS and rise in income means rise in AD. Both continue to rise till they reach to a level, where AD = AS.