Chapter 6 complete

contractionary gap and when actual GNP is more than potential GNP, this is called 
expansionary gap. Gaps are only defined relative to full employment
11
.
11.
Kamerschen, David, R, op.cit,: 281

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According to Keynes, the equality between saving and investment is the resultant of the 
changes in the level of income. If investment exceeds saving, S > I (see point E1 in the 
Figure 6.2), output and employment will rise that leads to increase in income. Increase in 
income will leads to increase in the price level and saving. Saving will exceeds till it reaches 
equilibrium level of national income at point E. When saving exceeds investment (S > I) at 
point E2 as shown in Figure 6.2, output and employment will be reduced, as a result income 
will be reduced as there will be no demand for goods and services. Consequently, price will 
be reduced and saving will be reduced. Saving will be reduced till it becomes equal to point 
E, where economy is in equilibrium. 
Thus, it is conclude that income theory of money and saving – investment theory 
emphasise on income that determines price level or value of money and not the supply of 
money.