Question

With the aid of a properly-labeled diagram, explain what adjustment would automatically take place if total planned spending (C+I) in Economia (a closed economy with no government) intersected the 45o line at a national income of $600 billion, but the economy temporarily found itself with national income of $615 billion.

Answer 1

The adjustment would automatically take place is an increase in saving.

Step-by-step explanation:

The adjustment that would automatically take place if total planned spending (C+I) intersects the 45o line at a national income of $600 billion, but the economy temporarily finds itself with a national income of $615 billion is an increase in saving.

When total planned spending is above the equilibrium level, there is excess demand in the economy, leading to an unplanned reduction in inventories. In response, firms increase their production to meet the higher level of demand, which results in a higher national income. This increase in income leads to an increase in saving, as individuals and firms save a portion of their additional income.

Overall, the adjustment that would automatically take place in this scenario is an increase in saving to return the economy to its equilibrium level of national income.