chapter  2
11 Pages

The Determination of Equilibrium Income

According to the first explanation, national income reaches a point of equilibrium if and when aggregate expenditure is exactly equal to aggregate income. To put the matter in more familiar terms, national income neither rises nor falls if and when total demand coincides with total supply, whether by accident or by design. We shall proceed on the simplifying institutional assumption that the private sector is the only source of aggregate demand in a 'closed' system. Later we shall drop this assumption and introduce the government and foreign trade sectors into the analysis.