Consider an economy where Y = $3,500 . C = $500 + (0.80Y), and where autonomous investment is equal to $200. a . Is this economy in equilibrium? Explain. b. What will happen if people try to increase their saving to $400
a . The economy is in equilibrium because C = $3,300 and I = $200 . Together, C + I = $3,500 . Notice that
intended investment and saving are equal since S = Y – C = $3,500 – $3,300 = $200.
b. If people try to increase their saving to $400 . then actual investment, which always equals saving, will
exceed intended investment. This will cause the equilibrium national income level to fall as firms react
to unplanned inventory investment by reducing production.
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