If planned saving is less than planned investment,what changes will bring economy in equilibrium?
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Mar 3
If planned saving is less than planned investment, it means that there is excess demand in the economy, which can lead to inflation and other imbalances. In order to bring the economy back to equilibrium, the following changes can be made:
1. Increase interest rates: By increasing interest rates, the central bank can encourage saving and discourage borrowing, which can help reduce excess demand in the economy.
2. Increase taxes: By increasing taxes, the government can reduce disposable income and consumption, which can help reduce excess demand in the economy.
3. Decrease government spending: By reducing government spending, the government can reduce overall demand in the economy, which can help bring it back to equilibrium.
4. Increase exports: By increasing exports, the economy can generate more income from abroad, which can help offset excess demand and bring the economy back to equilibrium.
5. Decrease imports: By reducing imports, the economy can reduce overall demand and help bring it back to equilibrium.
Overall, a combination of monetary, fiscal, and trade policies can be used to bring the economy back to equilibrium when planned saving is less than planned investment.