Where does equilibrium occur in an income expenditure diagram? What would be the effect if production is at either on the left or right side of the equilibrium point?
Equilibrium occurs at appoint at which the aggregate demand curve intersects the 45° line. To the left of the equilibrium point, the expenditure line lies above the 45° line. This means that total spending exceeds total output. Hence, inventories will be falling and firms will conclude that they should increase production. Thus, production will rise toward the equilibrium point. The opposite is true to the right of the equilibrium point. Here spending falls short of output, inventories rise, and firms will cut back production.
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The O-ring theory places emphasis on
a. education of the labor force. b. skill complementarities. c. purchases of machinery and equipment by firms. d. none of the above.
Total surplus is represented by the area below the
a. demand curve and above the price. b. price and up to the point of equilibrium. c. demand curve and above the supply curve, up to the equilibrium quantity. d. demand curve and above the horizontal axis, up to the equilibrium quantity.