Planned Aggregate Expenditure III

Equilibrium in the economy occurs when planned aggregate expenditure is equal to aggregate output. To determine this equilibrium level, we use the planned expenditure schedule and represent it graphically.

This graph represents aggregate output on the horizontal axis and planned aggregate expenditure on the vertical axis.

A horizontal line represents fixed planned investment at twenty-five dollars across all income levels. Separately, planned consumption is plotted, starting from its intercept and increasing steadily with rising output levels.

Combining consumption and investment results in the planned aggregate expenditure curve, which slopes upward. This curve demonstrates that planned expenditure increases as aggregate output rises, reflecting the positive relationship between income and spending.

A forty-five-degree line is drawn from the origin to serve as a reference for equilibrium—it represents all points where aggregate output exactly equals planned expenditure.

The intersection of the planned expenditure curve and the forty-five-degree line represents equilibrium

Thus, equilibrium is achieved at an aggregate output level of five hundred dollars, where firms sell exactly what they plan to produce, and the economy is in balance.