Question

Discuss how effective demand can be restored if ex-ante saving is less than ex-ante investment.

Answer 1

If ex-ante savings are less than ex-ante investment, it indicates that consumers plan to spend less on goods and services than producers intend to produce. As a result, unsold goods will accumulate, and inventories with producers will increase. In response, producers will reduce production. This adjustment will continue until the level of investment decreases and becomes equal to ex-ante savings.