Question

In Keynesian viewpoint the equilibrium level of income and employment in the economy will be established where

• A. AD>AS
• B. AS>AD
• C. AD = AS
• D. None of these

Hint:

Keynesian equilibrium is simple: the economy is in balance when the total amount people plan to spend (AD) is exactly equal to the total amount being produced (AS or National Income).

Answer 1

The Correct Option is C

According to John Maynard Keynes's theory of income determination, the equilibrium level of income, output, and employment in an economy is reached at the point where Aggregate Demand (AD) is equal to Aggregate Supply (AS).

Aggregate Demand (AD) is the total spending on goods and services in an economy (\(AD = C + I + G + (X-M)\)).
Aggregate Supply (AS) is the total value of goods and services produced, which is equal to the national income (Y).
If AD>AS, inventories would fall, and firms would increase production, raising income towards equilibrium. If AS>AD, inventories would pile up, and firms would cut production, reducing income towards equilibrium. The stable point is where total spending matches total output: \(AD = AS\).