From 2007 to 2012, the U.S. personal savings rate rose. If the additional savings were not translated into investment, Keynes would predict that aggregate income would:
A)decline and remain there.
B)rise indefinitely.
C)accelerate.
D)rise and remain there.

Question

Quizplus · Accepted Answer

According to Keynesian economics, if additional savings are not translated into investment, it would lead to a decrease in aggregate demand. This decrease in demand would then lead to a decrease in aggregate income, as businesses respond to lower demand by reducing production and possibly laying off workers. The economy would adjust to this new lower level of income and remain there unless there is a change in the level of investment or another component of aggregate demand.