Question

The two approaches to determination of the equilibrium level of income are:

• A. Aggregate demand-Aggregate supply approach
• B. Saving-Investment approach
• C. Demand-Supply approach
• D. Both A & B

Answer 1

The correct option is D Both A & B

Two approaches are:

1) Aggregate demand-Aggregate supply approach-

An economy is in equilibrium when aggregate demand for goods and services is equal to aggregate supply during a period of time.

So, equilibrium is achieved when:

AD = AS … (1)

We know, AD is the sum total of Consumption (C) and Investment (I):

AD = C + I … (2)

Also, AS is the sum total of consumption (C) and saving (S):

AS = C + S … (3)

Substituting (2) and (3) in (1), we get:

C + S = C + I.....(4)

2)Saving-Investment approach

According to this approach, the equilibrium level of income is determined at a level, when planned saving (S) is equal to planned investment (I).

from equation( 4)

S = I