How does an economy reach equilibrium? Use saving and Investment curve.
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The Saving curve (S) slopes upwards showing that as income rises, saving also rises. 1. The economy is in equilibrium at point 'E' where saving and investment curves intersect each other. the equilibrium level of income is Rs 400 crores, when planned saving – planned investment = RS 400 crores.
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According to this approach, the equilibrium level of income is determined at a level, when planned saving (S) is equal to planned investment (I). In Fig 8.2, Investment curve (I) is parallel to the X-axis because of the autonomous character of investments. At point 'E', ex-ante saving is equal to ex-ante investment.
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