Question

Mark the right option from the options given below in the Keynesian model of income determination:

Options

• total income in the short-run depends on the desired aggregate demand in the economy

• aggregate demand is positively related to income

• both total income in the short-run depends on the desired aggregate demand in the economy and aggregate demand is positively related to income.

• equilibrium income is always equal to full employment income

Answer 1

Both total income in the short-run depends on the desired aggregate demand in the economy and aggregate demand is positively related to income.

Explanation:

In the Keynesian model, short-run national income is determined by desired aggregate demand, as production and employment levels adjust directly to meet planned spending. Furthermore, aggregate demand is positively related to income because rising national income boosts household consumption. Lastly, equilibrium can occur below full employment.