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What is the equilibrium condition in the aggregate expenditure model?

What is the equilibrium condition in the aggregate expenditure model?

The equilibrium in the diagram occurs where the aggregate expenditure line crosses the 45-degree line, which represents the set of points where aggregate expenditure in the economy is equal to output, or national income. Equilibrium in a Keynesian cross diagram can happen at potential GDP—or below or above that level.

What is the equilibrium level of expenditure?

The equilibrium occurs where aggregate expenditure is equal to national income; this occurs where the aggregate expenditure schedule crosses the 45-degree line, at a real GDP of $6,000.

How do you calculate equilibrium level of expenditure?

Most simply, the formula for the equilibrium level of income is when aggregate supply (AS) is equal to aggregate demand (AD), where AS = AD. Adding a little complexity, the formula becomes Y = C + I + G, where Y is aggregate income, C is consumption, I is investment expenditure, and G is government expenditure.

What is the equilibrium level of GDP in the income expenditure model?

In the income-expenditure model, the equilibrium occurs at the level of GDP where aggregate expenditures equal national income (or GDP).

How do you find equilibrium?

Here is how to find the equilibrium price of a product:

  1. Use the supply function for quantity. You use the supply formula, Qs = x + yP, to find the supply line algebraically or on a graph.
  2. Use the demand function for quantity.
  3. Set the two quantities equal in terms of price.
  4. Solve for the equilibrium price.

When the aggregate expenditures model is in equilibrium equal income or real GDP?

If aggregate expenditures equal real GDP, then firms will leave their output unchanged; we have achieved equilibrium in the aggregate expenditures model. At equilibrium, there is no unplanned investment.

How do you calculate the equilibrium level of GDP?

To find the level of equilibrium real national income or GDP, you simply find the intersection of the AE curve with the 45° line. The levels of real GDP that correspond to these intersection points are the equilibrium levels of real GDP, denoted in Figure as Y 1, Y 2, and Y 3.

What is aggregate expenditure model?

An aggregate expenditure model is a macroeconomic tool used to measure and evaluate the total output of a country’s economy.

How do you calculate equilibrium level of income example?

  1. Consumption Function is C = 500+ 0.9 Y where Y in the income in the economy.
  2. At equilibrium level of income,
  3. AS=AD.
  4. Y= C+I.
  5. => Y= 500 + 0.9 Y + 3,000.
  6. => Y – 0.9 Y = 500 + 3,000.
  7. => 0.1 Y = 3,500.
  8. => Y = 3,500/ 0.1 = 35,000.

What is the relationship between aggregate planned expenditure and real GDP at equilibrium expenditure?

Equilibrium expenditure is the level of aggregate expenditure when aggregate planned expenditure equals real GDP. Equilibrium expenditure equals the real GDP at which the AE curve intersects the 45° line.

What is equilibrium quantity?

Equilibrium quantity is when there is no shortage or surplus of a product in the market. Supply and demand intersect, meaning the amount of an item that consumers want to buy is equal to the amount being supplied by its producers.