Question

In the determination of equilibrium income, equilibrium is established at the point where:

Options

• The Aggregate Demand (AD) curve intersects the 45° line

• The 45° line intersects the horizontal axis

• The AD curve intersects the vertical axis

• The AD curve becomes parallel to the 45° line

Answer 1

Equilibrium income is determined where the AD curve intersects the 45° line. Only at this intersection does planned aggregate expenditure exactly match the level of output, so there is no tendency for income to change.