i) Investment Exceeding Saving
|During depression, as a result of the expansion of investment employment of idle resources and money income for the people will increase. There will be some increase in prices but it will not be a steep rise because of a simultaneous increase in output. Once full employment is reached, the prices will rise in proportion to the rise in money supply.|
|Investment Exceeding Saving|
ii) Saving Exceeding Investment
|Saving Exceeding Investment|
- If saving and investment are in equilibrium (S = I), the price level will tend to be stable.
- If investment exceeds saving, the price level will rise.
- If saving exceeds investment, the price level will fall. Thus, contrary to the quantity theory of money, the income theory of money emphasizes those fluctuations in the price level are due to the changes in income rather than in the quantity of money.