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Class 12 Macroeconomics

, Determination of Equilibrium Level
 According to Keynesian theory, an economy is in equilibrium when aggregate
demand for goods and services is equal to aggregate supply during a period.
 So, equilibrium is achieved when : AD = AS
 We prove that : AD = C + I and,
AS = C + S
C+I=C+S
OR I=S
S=I

According to Keynes, there are two approaches to determining the equilibrium level of income,
output, and employment in the economy :


Aggregate Demand-Aggregate Supply
Saving-Investment Approach (S-I Approach)
Approach (AD-AS Approach)

It must be kept in mind that AD, AS, Saving, and investment are all planned or
ex-ante variables.

, Assumptions made in the determination of
equilibrium output are :
Determination of equilibrium output is studied in the context of a
two-sector model (households and firms) i.e. there is no
government and foreign sector.


It is assumed that investment expenditure is
autonomous.


The price level is assumed to be constant.


Equilibrium output is to be determined in the
context of a short-run.