Question

Which of the following statements is a correct description of Say's law in a money economy?

A. A rise in saving would lead to a fall in consumption, thereby decreasing aggregate demand.
B. This law holds only if the interest rate is fixed.
C. A rise in saving does not change aggregate demand.

Answer 1

Answer:

C. A rise in saving does not change aggregate demand.

Explanation:

Say's law states that the production of goods creates its own demand.

According to Say's law, in a money economy, a rise in saving does not change aggregate demand because total expenditure amount does not change, it only moves from consumption category to the investment category in equal proportion.

Also, disposable income stays constant and consumption decreases, while savings increases.

Savings = disposable income - consumption.