At the short run equilibrium of income and employment, _____.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Ex-ante saving = Ex-ante investment
In the short-run equilibrium of income and employment in an economy, the total planned (ex-ante) savings by households are exactly equal to the total planned (ex-ante) investment by firms.
If ex-ante saving > ex-ante investment, aggregate demand falls short of aggregate supply, leading to a fall in income.
If ex-ante saving < ex-ante investment, aggregate demand exceeds supply, leading to a rise in income.
Thus, equilibrium is reached only when ex-ante saving equals ex-ante investment.