Question

How income get determined in economy? Explain with aggregate demand?

Answer 1

BREAKING DOWN Aggregate Demand

As a macroeconomic term describing the total demand in an economy for all goods and services at any given price level in a given period, aggregate demand necessarily equals gross domestic product (GDP), at least in purely quantitative terms, because the two share the same equation. As a matter of accounting, it must always be the case that the aggregate demand and GDP increase or decrease together.

Technically speaking, aggregate demand only equals GDP in the long run after adjusting for the price level. This is because short-run aggregate demand measures total output for a single nominal price level, not necessarily (and in fact rarely) equilibrium. In nearly all models, however, the price level is assumed to be “one” for simplicity. Other variations in calculations can occur depending on methodological variations or timing issues in gathering statistics.