To start with, let us assume saving investment equilibrium. Also assume that the investment expenditure increases in the economy without an equal reduction in the consumption expenditure. This is a case of an excess of investment over saving.

This excess of investment over saving may be possible by an expansion of money through credit creation by commercial banks or by the dishoarding of wealth by the people.

This excessive investment increases the money income of the consumers due to increased employment resulting from increased investment. The consumers in turn spend more on consumer goods.

It raises the prices of the consumer goods and hence the profits of the producers manufacturing consumer goods. They tend to increase their investment in anticipation of still higher profits. This cumulative process of expanding investment continues.


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.

But the saving-investment disequilibrium will not last long. When income rises as result of investment exceed­ing saving, saving being a function of income also starts rising.

This reduces the gap between investment and saving and once again saving investment equality is achieved. This new equilibrium is at higher levels of in­come, output, employment and prices.