Question

What are the two approaches for determining the equilibrium level of income?

Answer 1

The two approaches of determining the equilibrium level of income are

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

(ii) S and I approach, where the equilibrium is reached only when Investment(I) is equals to Savings(S) because at this level there is no excess savings or investment in the economy and the planned output is cleared by the market demand.