Question

Explain national income equilibrium through ad and as

Answer 1

Answer:

The equilibrium is reached only when aggregate demand (AD) equals aggregate supply (AS) because at this level there is no tendency for income and output to change.

In the diagram the equilibrium is at K where AD intersects 45 line. At this point, AD = AS.

Explanation:

When AD is less than AS (say, at point S), then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till AD becomes equal to AS.

So, equilibrium takes place only at point K, when AD = AS.

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