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Explain national income determination through the two alternative approaches. Use diagram. |
Answer» Solution :According to the Keynesian Theory, equilibrium condition is generally stated in terms of aggregate demand (AD) and aggregate supply (AS). An economy is in equilibrium when aggregate demand for goods and services is equal to aggregate supply during a period of time.So, equilibrium is achieved when:AD = AS … (1)We have SEEN how equilibrium level of national income is determined by the interaction of aggregate demand and aggregate supply.. But there is an alternative method for the explanation of the determination of national income. This alternative method EXPLAINS the determination of national income DIRECTLY by intended saving and investment So, equilibrium is achieved when :S = I ...... (2)The national incomedetermination can be better understood with the help of followng DIAGRAM: |
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