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23 April, 00:08

Suppose that, at a given level of disposable income, consumers decide to save more. Explain what effect this decision will have on equilibrium income. Also, explain what effect this decision will have on the level of saving once the economy has reached the new equilibrium.

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  1. 23 April, 00:20
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    decrease; less saving
  2. 23 April, 00:30
    0
    Answer: decrease; less saving

    Explanation:As people attempt to save more, the result is both a decline in output and unchanged saving. Although people want to save more at a given level of income, their income decreases by an amount such that their saving is unchanged. As people save more at their initial level of income, they decrease their consumption. But this decreased consumption decreases demand, which decreases production. A change in autonomous spending has a different effect on output than the actual change in autonomous spending.
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