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| 1. |
Why must aggregate demand be equal to aggregate supply at the equilibrium level of income ? Explain |
| Answer» Solution :AD must be equal to AS, OTHERWISE changes will take place in the economy till AD equals AS,i.e., till the economy REACHES the equilibrium level. Suppose AD is greater than AS. This will lead to decline in the desired or PLANNED level of stocks with producers. To bring back the STOCK, or inventories, to the desired level, the producers will raise output, i.e., AS, till AD and AS are equal again. If AD is less than AS, the opposite will happen. | |