Question

Read the following statements carefully: 
Statement 1: Expost savings and Expost investments are equal at all levels of income. 
Statement 2: Under the effective demand principle, the equilibrium output is equal to exante Aggregate Demand (AD). In the light of the given statements, choose the correct alternative from the following:

• A. Statement 1 is true and Statement 2 is false.
• B. Statement 1 is false and Statement 2 is true.
• C. Both Statements 1 and 2 are true.
• D. Both Statements 1 and 2 are false.

Hint:

In a balanced economy, savings and investments always match. The equilibrium output is determined when Aggregate Demand equals actual output.

Answer 1

The Correct Option is C

Statement 1 is true: Expost savings and investments are equal because savings always equal investment in an economy when accounting for all income. The total savings will be used for investments. 
Statement 2 is true: Under the effective demand principle, the equilibrium output is determined when exante Aggregate Demand (AD) equals actual output, i.e., the economy is at full employment. 
Conclusion: Both statements are correct: Expost savings and investment are equal, and the equilibrium output is determined by exante Aggregate Demand.