Question

Aggregate demand in the two-sector model shows:

Options

• The total autonomous expenditure independent of income

• The total demand (Consumption + Investment) at each level of income

• The total supply of goods at each price level

• The equilibrium level of income where saving equals investment

Answer 1

Aggregate demand shows the total demand, which is the sum of Consumption and Investment, at each level of income. Algebraically it is \[AD=\bar{C}+\bar{I}+cY\], combining the consumption function \[C=\bar{C}+cY\] and investment \[I = \overline{I}\].