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How employment is determined by savings and investment ?

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The Equilibrium Level of output of an economy can be determined by A.D.(C + I) and A.S.(C + S) approach or by I and S approach. Both these approaches provides the same conclusions. By S and I approach, the economy will be in equilibrium at that income level where saving and investment are equal or saving function curve intersects the investment function curve. 

In the present diagram SS is the saving function curve, which shows the desired saving at each level of income by all the savers of the economy. Saving function curve starts from below the origin because at lower income levels savings are negative (because consumption is more than income). As the income increases saving will also increases. That’s why saving function curve is upward sloping.

Here we assumes that firms plans to invest the same amount at different level of income (autonomous investment), therefore investment curve is parallel to X axis. At ‘E’ point in present diagram I = S, which shows the equilibrium point of economy. So at output level ‘OY’ planned saving and planned investment are equal to ‘EY’. In the present example when income was Rs 120 crores saving and investment are equal to Rs 10 crores each. Therefore Rs 120 crore is equilibrium level of income of economy. 

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