CA Foundation · Business Economics · Determination of National Income
In a simple two-sector economy, which of the following correctly describes the equilibrium condition for national income?
Equilibrium income in a two-sector economy occurs where aggregate demand equals aggregate supply, which is the same as planned saving equaling planned investment. At that point, firms have no unplanned stock changes and no pressure to change output, so income stays stable.
- AAggregate demand equals aggregate supply, so planned saving equals planned investmentCorrect
- BPlanned saving exceeds planned investment
- CConsumption equals investment
- DAutonomous consumption equals autonomous saving
Explanation
In a two-sector model, income is in equilibrium when aggregate demand (C + I) equals aggregate supply (C + S). Cancelling C gives S = I in planned terms. If saving exceeded investment, demand would fall short of output and income would contract.
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