If planned savings exceeds planned investments in an economy, explain its likely impact on income, output and employment.

Question :If planned savings exceeds planned investments in an economy, explain its likely impact on income, output and employment.

The correct answer is -When planned savings exceed planned investments in an economy, it creates a situation of a savings glut, which means there is an excess supply of savings in the economy. This results in a reduction in the demand for goods and services, leading to a decrease in income, output and employment.

When there is a savings glut, the interest rates tend to fall, making borrowing cheaper. However, since the planned investments are lower than the planned savings, there are fewer profitable investment opportunities available, leading to a lower demand for credit by firms. As a result, the demand for loanable funds falls, leading to a decline in the interest rates.

The decline in interest rates leads to lower returns on savings, which may discourage saving and lead to a decline in planned savings. On the other hand, the decrease in investment opportunities and the lower demand for credit by firms may lead to a reduction in planned investment.

Overall, the situation of planned savings exceeding planned investments leads to a decrease in aggregate demand, which results in a decline in income, output, and employment.