Equilibrium income, Macroeconomics

Equilibrium Income 

The next step is to use the aggregate demand function, AD, to determine the equilibrium level of income and output. This is done in figure . Recall that the equilibrium level of income is that level of income for which aggregate demand equals output (which in turn equals income). The 839_Production Account13.png  line which you see in the figure serves as a reference line that translates any horizontal distance into equal vertical distance.

Thus, anywhere on the 1269_Production Account13.png  line, the level of aggregate demand is equal to the level of output. The level of income at which the aggregate demand line cuts the  1751_Production Account13.pngline is the equilibrium income. We see from the figure that at an income level Y* the aggregate demand curve cuts the 45o. At Y*, aggregate demand is equal to income and thus is the equilibrium income and output. At any income level below Y*, firms find that demand exceeds output and that their inventories are declining. This unintended decline in inventories is shown as Im < 0 in the figure. In order to make up for the decline in inventories, firms increase production. Conversely, for output levels above Y*, firms find inventories piling up (Im > 0) and therefore cut production. As the arrows show, this process leads to output level Y*, at which current production equals planned aggregate spending and unintended inventory changes are equal to zero. Now, let us derive the formula for equilibrium output. At equilibrium, output is equal to aggregate demand. 

                                        Figure 4.3 

 

2441_Production Account13.png

 

                 Y            = AD 

                     =   1993_Production Account13.png    + bY 

 358_Production Account13.png         Y (1 - b)   = 1302_Production Account13.png

 1628_Production Account13.png        Y  =1032_Production Account13.png

 

From the above equation we can see that the larger    is, (for a given b) the higher is the equilibrium level of income. That is, the larger the autonomous spending, indicated by   , the larger is the equilibrium level of income. Similarly, for a given   , the greater the slope (b) of the AD curve, the higher is the equilibrium level of income. 

 

 

 

 

 

 

 

 

 

 

 

 

Posted Date: 9/13/2012 5:18:22 AM | Location : United States







Related Discussions:- Equilibrium income, Assignment Help, Ask Question on Equilibrium income, Get Answer, Expert's Help, Equilibrium income Discussions

Write discussion on Equilibrium income
Your posts are moderated
Related Questions
explain the neo-classical theory of trade and show the difference between this and the classical approach, as wellas the similarities

factor contribute long run trend of term of trade in developing country

Q. Explain the labor market in the cross model? In cross model, both P and W are exogenous andconstant. Hence real wage is constant and it is not essentially equal to the equil

casual factors of the traditional business cycle and its effect on sectors of the economy?

y explain whether you agree or disagree with the following statements. “If nominal GDP is less than real GDP, then the price level must have fallen during the year.”

What is Bolivia''s growth in 1985?

(Effects of Fiscal Policy) Recently some legislators have called for tax increases to reduce the federal budget deficit. Conservatives have countered that such tax increases could



Suppose the ABC chemical company discovers a drug that cures the common cold. ABC has plants in Europe and in the United States and can produce the drug in either continent at a ma