Discuss the working of the adjustment mechanism in the following situations:
- Aggregate demand is greater than Aggregate supply.
- Ex-ante Investments are lesser than Ex-ante Savings.
CBSE 58-1-1 PAPER SET 2019
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- When Aggregate Demand is greater than Aggregate Supply (AD > AS), buyers are planning to, buy more goods and services than what producers are planning to produce. It will lead to fall in planned inventories below the desired level. The producers in turn will produce more, which will raise the income level i.e. AS, till AD becomes equal to AS.
- Ex-ante investments are lesser than Ex-ante saving (I < S) means buyers are planning to buy lesser output as to what producers are planning to produce. It will lead to rise in planned inventories above the desired level. As a result the producers will cut down production, leading to reduction of income till savings becomes equal to investments.
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