(a)

“In an economy ex-ante investment (I) is less than ex-post savings (S).”

(a)

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

(b)

Define deficient demand.

When investments are less than savings, it means households are planning to consume less than what the firms expected them to consume.

This will lead to unintended accumulation of inventories. To clear the unwanted inventories, producers may intend to decrease production in the economy. Consequently, this may lead to a decrease in the level of output, employment, and income.

Deficient demand refers to a situation where Aggregate Demand (AD) falls short of Aggregate Supply (AS) corresponding to the full employment level of output.