Question

State whether the following statements are true or false. Give valid reasons for your answers.
(i) Unplanned inventories accumulate when planned investment is less than planned saving.
(ii) Deflationnry gap exists when aggregate demand is greater than aggregate supply at full employment level.
(iii) Average prooensity to save can never be negative.

Answer 1

(i) True, as planned savings are more causing the Marginal Propensity to Consume to reduce thus Aggregate Demand will fall and producers will have accumulation of inventory.
(ii) False, Inflationary Gap exists when actual Aggregate Demand is more than Aggregate Supply corresponding to full employment level of output in the economy.
(iii) False, at income levels which are lower than break-even point, Average propensity to save can be negative as there will be dissaving in the economy.