If income is saved, then it will increase inventory investment by this amount which makes Savings = Investment
However, if Income is invested, then how will Savings = Investment???
Also in investment multiplier, the term 'investment' refers to only final investment expenditure or it includes normal consumption expenditure as well because that too will generate income????
Dear student,
if savings is not equal to investment, then it implies two situations, either S> I or S< I.
In case S>I, then AD becomes less than AS as people are saving more. This further implies unsold inventory, due to which the producers now plan lesser output. Lesser output then implies lesser income and thus, lower savings, ultimately leading to S=I.
On the other hand, in case S<I, then AD becomes higher than AS as people are saving less. This implies excess inventory, due to which the producers now plan greater output. Now, greater output implies more income and thus, more savings, ultimately leading to S=I.
In multiplier, investment simply implies the amount of investment expenditure.
if savings is not equal to investment, then it implies two situations, either S> I or S< I.
In case S>I, then AD becomes less than AS as people are saving more. This further implies unsold inventory, due to which the producers now plan lesser output. Lesser output then implies lesser income and thus, lower savings, ultimately leading to S=I.
On the other hand, in case S<I, then AD becomes higher than AS as people are saving less. This implies excess inventory, due to which the producers now plan greater output. Now, greater output implies more income and thus, more savings, ultimately leading to S=I.
In multiplier, investment simply implies the amount of investment expenditure.