In chap 17 it is mentioned that equlilibrium national income is the level at which injections is equal to withdrawals , and later in the chapter it is also mentioned that equilibrium national income is the level at which aggregate demand is equal to supply, so are these two points equal and if yes then how they both are equal?
Is it because in AD-AS model , at all points in AD curve withdrawals is equal to injections , as at higher price and lower gdp mpc is less than mpc when prices are low and gdp is high thus overall withdrawals are same as injections?
Hi Divyam Apologies for the delay in reply, I’m away teaching at present. Yes, assuming both models are accurate, I would expect the equilibrium level of national income to be the same in each model. In the circular flow of income model, when national income is at it’s equilibrium level we would expect aggregate demand (AD, or planned expenditure (E)) to be equal to national output (or income). Money is just flowing round and round the economy. Similarly, in the AD-AS model, the equilibrium national income and price level occurs where aggregate demand (AD) equals Aggregate Supply (AS), where AS is the total level of output in the economy. Why, according to the circular flow of income, will planned injections equal planned withdrawals when we are at the equilibrium level of national income? Well consider the situation where there is a rise in injections into the economy, perhaps because of an increase in government spending. This is an increase in aggregate demand and so firms produce and sell more of their goods ie there is an increase in output. In turn these firms pay higher wages, dividends etc and national income rises. But as households’ incomes rise, so will withdrawals because not only do households spend more on domestically produced goods, they also save more, pay more tax and spend more on imports. Those withdrawals carry on rising until they are equal to the injections and the economy is in equilibrium again. Best wishes Gresham
