In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when
A) actual saving equals actual investment.
B) planned aggregate expenditures equal total output.
C) consumption equals income times the marginal propensity to consume.
D) the marginal propensity to consume equals planned output.

Question

Quizplus · Accepted Answer

The Keynesian aggregate expenditure model states that equilibrium is achieved when planned aggregate expenditures (PAE) equal total output or income (Y). PAE includes consumption, investment, government spending, and net exports. Therefore, the equation is PAE = Y. When PAE is less than Y, firms are producing more than is being demanded, and inventory levels rise, causing firms to cut back on production and employment. When PAE is greater than Y, firms are unable to meet the demand, and inventory levels fall, causing firms to increase production and employment. Only when PAE is equal to Y is the economy in a state of equilibrium. Therefore, the correct answer is (B) planned aggregate expenditures equal total output.

In the Keynesian Aggregate Expenditure Model, the Equilibrium Level of Income