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| 1. |
What are two appraoches for determining the equilibrium level of income? |
| 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 know, AD is the sum total of Consumption (C) and Investment (I):AD = C + I … (2)Also, AS is the sum total of consumption (C) and saving (S):AS = C + S … (3)Substituting (2) and (3) in (1), we get:C + S = C + IOr, S = IIt means, according to Keynes, there are Two Approaches for determining the equilibrium level of income and employment in the economy: (i) AD-AS Approach(ii) S-I Approach | |