In a simple macro model with no government and no foreign trade, the equilibrium level of national income is the level of income at which
A)aggregate desired expenditure is greater than actual national income.
B)saving equals consumer spending.
C)aggregate desired expenditure equals consumer spending.
D)saving equals income.
E)aggregate desired expenditure equals actual national income.

Question

Quizplus · Accepted Answer

In a simple macro model with no government and no foreign trade, there are only two components of aggregate desired expenditure: consumption and investment. Since there is no government or foreign trade, there is no government spending or net exports to consider. Therefore, the equilibrium level of national income is the level at which aggregate desired expenditure equals actual national income. This is because if aggregate desired expenditure is less than actual national income, there will be a surplus of goods and services and producers will cut back on production, leading to a decrease in national income. Conversely, if aggregate desired expenditure is greater than actual national income, there will be a shortage of goods and services and producers will increase production, leading to an increase in national income. Only when aggregate desired expenditure equals actual national income is there no pressure for national income to change, and the economy is in equilibrium.

In a Simple Macro Model with No Government and No