If households decide to save a larger portion of their incom

If households decide to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run? What about the long run?

Solution

Ans

In the shorn output, employment and price level will fall because consumption will fall due to rise in savings. In other ways Aggregate demand shifts leftwards. But in longrun Aggregate supply will shift rightwards due to greater investment. Thus output, employment will rise and price level will fall.