Equilibrium level of income is determined at a level where ________________________.
Equilibrium level of income is determined at a level where ________________________.
The correct option is A planned investment equals planned saving
According to this approach of
equilibrium, the equilibrium level of income is determined only when planned Investment(I) equals to planned Savings(S) because at this level there is no tendency for income and output to
change.
In the diagram the equilibrium is at E1 where savings intersects
investment curve At this point, I=S.
When S is more than I , then the planned inventory would fall below the desired
level. To bring back the Inventory at the desired level, the producers expand
the output More output means more income. Rise in output means rise in I
and rise in income means rise in S. Both continue to rise till they reach E1,
S=I.
When S is less than I, then the planned inventory rises above the desired
level. To clear the unwanted increase in inventory, firms plan to reduce the
output till S becomes equal to I.
So, equilibrium takes place only at point E1, when S=I which is the point of equilibrium level of income in the economy.
According to this approach of
equilibrium, the equilibrium level of income is determined only when planned Investment(I) equals to planned Savings(S) because at this level there is no tendency for income and output to
change.
In the diagram the equilibrium is at E1 where savings intersects
investment curve At this point, I=S.
When S is more than I , then the planned inventory would fall below the desired
level. To bring back the Inventory at the desired level, the producers expand
the output More output means more income. Rise in output means rise in I
and rise in income means rise in S. Both continue to rise till they reach E1,
S=I.
When S is less than I, then the planned inventory rises above the desired
level. To clear the unwanted increase in inventory, firms plan to reduce the
output till S becomes equal to I.
So, equilibrium takes place only at point E1, when S=I which is the point of equilibrium level of income in the economy.
