Question

In the income–aggregate demand diagram, the points E₁ and E₂ respectively represent:

Options

• Two points of excess demand lying on the same AD curve

• The points where the 45° line crosses the vertical axis

• The new equilibrium at Y = 250 and the old equilibrium at Y = 300

• The old equilibrium at Y = 250 and the new equilibrium at Y = 300

Answer 1

E₁ marks the initial equilibrium where AD₁ cuts the 45° line at income Y = 250. After the upward shift of aggregate demand to AD₂, a new equilibrium E₂ is established at the higher income level Y = 300.