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Model of National Income as developed by Keynes

Model of National Income as developed by Keynes


As with many other aspects of economics, one is unlikely ever to see an economy is equilibrium, in this case AE = AS. But what is more important is to understand what happens when the economy is not in equilibrium.

This is best explained on the hand of a diagram. Here equilibrium occurs when national income is valued at OY1. At point E the aggregate expenditure = aggregate supply point of equilibrium, all goods and services produced are sold. But if the national income is either below or above OY1 the macro-economy is in disequilibrium and the national income, or supply, will change. If the aggregate expenditure had to equal BY2 and aggregate supply is AY2 this would mean that people where consuming more than was being supplied. The distance between AB would be the amount in which stocks were being used up. In other words people where buying more than producers were supplying, and in order to meet the extra demand stocks were bei...

Posted by: William Katz

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