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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

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?

To determine

Impact on output, price level and employment rate if households decide to save more Income.

Explanation

Income is either saved or consumed. If households have decided to save more of their income, it implies they will consume less and save more.

As consumption is a component of Aggregate demand, any change on consumption will lead to change in AD. Thus, fall in consumption level will decrease aggregate demand. So, there is leftward shift in AD curve. Due to leftward shift of AD curve, keeping Aggregate supply curve constant, there is fall in output level and price level. This also leads to increase in unemployment level.

In the above diagram, AD curve shifted leftward from AD1 to AD2, there is decline in price from P1 to P2 and Real GDP from Y1 to Y2...

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