Question -
Answer -
- The level at which the economy is in equilibrium, i.e., where aggregate demand = aggregate supply, is called effective demand.
- Under fixed price model, the value of planned (ex-ante) aggregate demand for final goods AD is equal to ex-ante consumption plus ex-ante investment expenditure.
3. As we know that the equilibrium level of national income in two sector model is determined where,
AS = AD
4. Diagrammatical representation,
and at the same level of national income, i.e., OY, aggregate demand is greater than aggregate supply. Production will have to be increase to meet the excess demand. Consequently, national income will increase from OY to O { Y }_{ 1 }
As, we know positive relationship exists between national income and consumption, so consumption will increase which will, increase the new aggregate demand A { D }_{ 1 }
, till we reach the new equilibrium level of output i.e.,