Question

The equilibrium condition in the Keynesian model of income determination is:

Options

• \[Y=AD\]

• \[C=S\]

• \[Y>T+G\]

• \[AD>I+G\]

Answer 1

Equilibrium requires that output equal aggregate demand: \[Y=AD\], or fully, \[Y=\overline{C}+c(Y-T+\overline{TR})+I+G\]. Solving this condition yields the equilibrium income formula with the multiplier \[\frac{1}{1-c}\].