In the income-expenditure model, equilibrium output is the level of output at which the 45-degree line intersects the planned expenditures line. Explain why this output level is an equilibrium level
Illustrate your answer with a diagram of the income-expenditure model.
Equilibrium refers to a position of rest or one in which there are no forces acting to cause a change. At the intersection of the spending line and the 45-degree line this is the case because spending is equal to y, which represents output and income. Therefore all income is being spent and all the output produced has been purchased. At any point other than this intersection this equality will not hold and there will be either insufficient production (based on excess demand) or excess production (based on insufficient demand) and a tendency for y to change.
You might also like to view...
If the quantity of money supplied is greater than the quantity of money demanded, then the
A) price of financial assets falls. B) money supply decreases. C) nominal interest rate rises. D) nominal interest rate falls. E) price level falls.
If the market for maple syrup is perfectly competitive, then in the long-run equilibrium, firms are
A) entering the market. B) exiting the market. C) making zero economic profit. D) temporarily shutting down.
Economic profit is always positive when
A. accounting profit is positive. B. accounting profit is zero. C. accounting profit is greater than the firm’s opportunity costs. D. accounting profit is less than the firm’s opportunity costs.
If a decrease in the price of movie tickets increases the total revenue of movie theaters, this is evidence that demand is:
a. price elastic. b. price inelastic. c. unit elastic with respect to price. d. perfectly inelastic.