If income is invested, then what chian effects will happen in the economy making Savings = Investment???
Dear student,
In a situation when investment exceeds savings, the injections into the circular flow of income is greater than the withdrawal from the income, i.e. total expenditure is greater than the supply of goods. In such a situation there is unplanned depletion of inventory. In response to this, to increase in the stock of output the producers plan to expand production in the next period; thereby increase the employment of factors of production. This further leads to rise in aggregate income in the economy, consequently higher aggregate savings. The saving will continue to rise till it becomes equal to investment.
In a situation when investment exceeds savings, the injections into the circular flow of income is greater than the withdrawal from the income, i.e. total expenditure is greater than the supply of goods. In such a situation there is unplanned depletion of inventory. In response to this, to increase in the stock of output the producers plan to expand production in the next period; thereby increase the employment of factors of production. This further leads to rise in aggregate income in the economy, consequently higher aggregate savings. The saving will continue to rise till it becomes equal to investment.