Page 2 - lesson note--Income Determination and Multiplier43

• The three sectors of economy plan to consume less than what the
producers plan to produce.

• It leads to a rise in planned inventory beyond the desired level.
• In order to bring the planned inventory to the desired level, the
producers reduce production, it leads to a decrease in
employment, output and in turn national income.
• It will continue till AS=AD.

Savings and Investment approach: -

According to J.M.Keynes the equilibrium level of national income, output and
employment is determined at the point where

=

=> + = +

=> =

Y
In the given diagram the S
equilibrium point is determined

at the point E where S = I and
equilibrium level of national E S ˃ I

income is I

S ˂ I

X
O

−
0

Case-1: - When > , it implies that

• The economy plans to consume less than what the producers plan
to produce.

• It leads to an increase in planned inventory beyond the desired
level.

• In order to bring the panned inventory to its desired level the
producer will reduce production resulting a fall in in employment,
output, national income and saving.
• It will continue till =

Case-2: - When ˂ , it implies that

• The economy plans to consume more than what the producers
plan to produce.
• It leads to a decline in planned inventory below the desired level.