How is the equilibrium level of income attained through AD and AS approach?
According AD and AS approach,
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.
The equilibrium is where AD
intersects 45 line. At this point, AD = AS.
When AD is more than AS , 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 AS and rise in
income means rise in AD. Both continue to rise till AD =
AS.
When AD is less than AS, 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 ,
where AD = AS.
According AD and AS approach,
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.
The equilibrium is where AD
intersects 45 line. At this point, AD = AS.
When AD is more than AS , 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 AS and rise in
income means rise in AD. Both continue to rise till AD =
AS.
When AD is less than AS, 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 , where AD = AS.
