Question

According to John Maynard Keynes, which one of the following statements is correct for a closed economy operating at less than the full employment level of output?

• A. Savings determines investment
• B. Investment determines savings
• C. Changes in the money supply have no impact on output
• D. Speculative demand for money is determined by the output level

Hint:

In Keynesian economics, at less than full employment, income adjusts to ensure $S = I$. Investment is autonomous, while saving is induced.

Answer 1

The Correct Option is C

Step 1: Keynesian view on determination of output.
In a Keynesian closed economy operating below full employment, output and employment are primarily determined by **aggregate demand**, not aggregate supply.
Step 2: Causal relationship.
- Investment is the active factor — determined by expectations of profit and interest rates. - Savings is passive — it adjusts automatically to match investment through changes in income. Thus, in disequilibrium, changes in investment cause income to change, which in turn alters saving. Therefore, **investment determines saving**.
Step 3: Conclusion.
Hence, the correct statement is that investment determines savings.