National Income: According to Keynesian theory, an economy is in equilibrium when aggregate demand (AD) for goods and services is equal to aggregate supply (AS) during a period of time and doesn’t show any tendency to change. So, equilibrium is achieved when AD = AS, i.e. when planned investment is equal to planned saving. According to Keynes, there is another approach through which equilibrium income is determined and that is called S and I approach. The two approaches for determination level are: · AD – AS approach · S – I approach. Assumptions in determination of equilibrium income: · This determination of income assumes two sector economy, which means there is only firms and households. · There is no government sector, which means there is no government spending and taxes. · It is closed economy, which means there is no international trade with the rest of the world i.e., there is no export and import. ·
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