In the simple Keynesian model, if desired investment is greater than desired saving
A) the multiplier effect will move the economy to a lower income level.
B) income and output will rise.
C) the interest rate will fall.
D) actual saving will fall as the economy moves to a lower output level.

Question

Quizplus · Accepted Answer

In the simple Keynesian model, the equality of desired saving and desired investment determines the equilibrium level of output. If desired investment is greater than desired saving, it implies that there is an unplanned increase in inventories, which would lead firms to increase output and income to sell off the excess inventory. As a result, income and output will rise until desired saving equals desired investment again. The multiplier effect amplifies this initial increase in output and income, which means the increase will be larger than the initial excess of desired investment over desired saving. The other options are not necessarily true in this situation.

In the Simple Keynesian Model, If Desired Investment Is Greater