Question

Read the following statements carefully:
• I. Every increase in investment necessarily increases Aggregate Demand.
• II. Ex-ante savings are always equal to Ex-post savings.
• III. Ex-ante investment and Ex-ante savings may differ.
• IV. Equilibrium income is determined at the point where Aggregate Demand equals Aggregate Supply. Choose the correct answer.

• A. I, II and III only
• B. II, III and IV only
• C. I, III and IV only
• D. I, II, III and IV

Hint:

Remember: \[ \text{Ex-post Savings}=\text{Ex-post Investment} \] always. However, \[ \text{Ex-ante Savings} \neq \text{Ex-ante Investment} \] in general.

Answer 1

The Correct Option is D

Concept: Macroeconomic equilibrium involves interactions among aggregate demand, aggregate supply, savings, and investment. A clear distinction must be made between:
• Ex-ante (planned)
• Ex-post (actual) values.

Step 1: Examine Statement I. Investment is a component of Aggregate Demand. \[ AD=C+I+G+(X-M) \] An increase in investment directly increases Aggregate Demand. Hence Statement I is correct.

Step 2: Examine Statement II. Actual savings and actual investment are always equal in national income accounting. Therefore Ex-post savings are always equal to Ex-post investment. Hence Statement II is correct.

Step 3: Examine Statement III. Planned savings and planned investment are determined independently. Therefore: \[ S_{ex\text{-}ante} \neq I_{ex\text{-}ante} \] in general. Hence Statement III is correct.

Step 4: Examine Statement IV. National income equilibrium occurs when: \[ AD=AS \] At this point firms have no incentive to change output. Hence Statement IV is correct.

Step 5: Final conclusion. All four statements are correct. Therefore the correct answer is: \[ \boxed{\text{I, II, III and IV}} \] Option (D) is correct.