Discuss the working of the adjustment mechanism in the following situations :

(a) Aggregate demand is greater than the Aggregate supply.

(b) Ex Ante Investments are lesser than Ex Ante Savings.

(a) The working of the adjustment mechanism when aggregate demand is greater than aggregate supply is explained below-

i-When the aggregate demand exceeds the aggregate supply; it means that the planned level of Expenditure exceeds than what the firms are willing to produce.

ii- the plant inventory falls behind the expected level.

iii- The firms then plan to increase the production to increase the level of inventory to the expected level.

iv - The firm would hire more workers, which would increase the employment, output, and income.

v - The level of income would continue to increase till the aggregate demand is equal to aggregate supply.

b) The working of the adjustment mechanism when ex-ante investments are lesser than ex-ante savings is explained below-

When the ex-ante investment is less than the ex-ante savings, it means that the households are not consuming as much as the firms expect them to.

ii- The plant inventory stocks up and exceeds the expected level.

iii- The firms then plan to decrease the production to decrease the level of inventory to the expected level.

iv - The firm would lay off the workers, which would decrease the employment, output, and income.

v - The level of income would continue to fall until the savings is equal to the investment.