(i)

“In an economy, ex-ante investment (I) exceeds ex-ante savings (S).”

(i)

Explain the likely impact of the given situation on output, employment and income.

(ii)

Define excess demand.

When ex-ante investment (I) exceeds ex-ante savings (S) it means households are planning to consume more than what the firms expected them to consume. This will lead to unintended decumulation of inventories. To restore the desired/intended level of inventories, producers may expand production in the economy which may increase the output, employment and income level.

Excess demand refers to a situation when Aggregate Demand (AD) exceeds Aggregate Supply (AS) corresponding to the full employment level of output.