Q18 of 25 Page 1

Describe the adjustment mechanism, if in an economy the planned savings are more than the planned investments.

● The economy is in equilibrium at the income level where the saving is equal to investment.


● If the planned savings are more than the planned investment it will lead to an increase in the inventory kept with the producers.


● To reduce the inventory to the desired level, the producers will cut down the production which will bring down the income.


● This movement continues until saving is equal to investment.


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16

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Discuss briefly the relationship between marginal propensity to save and investment multiplier, using a hypothetical numerical example.

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State whether the following statements are true or false. Support your answer with reason.

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Distinguish between net factor income from abroad and net exports.

OR


What are ‘non-monetary exchanges’? Discuss with a suitable example.