Question

AS/AD model - If there is a decrease in Aggregate Income and Spending in this economy, then the equilibrium could shift from ________________ and that would be a _____________..

Answer 1

Answer: The equilibrium will shift from right to left, and that would be a recessionary gap

Explanation:

Aggregate supply is the quantity of goods and services producers make available for sale and is equal to the money income received by the owner's of the factors of production. Aggregate demand is the total demand for final goods and services in the economy at a given period of time and at a given price level. It is the sum of money consumers planned to spent on the purchase of output in an economy at a given period of time.The equilibrium level of income is the income level at which aggregate supply equals aggregate demand. The Aggregate income on the other hand, is the total amount of income received by all factors of production in an economy at a given period.

If there is a decrease in aggregate income and spending in an economy, the equilibrium level of income shift from right to left and that would be a recessionary gap. The recessionary gap occurs when when the aggregate demand consisting of consumption, investment and government expenditure is not enough to create condition of full employment. It is the difference of the amount by which aggregate expenditure falls short of the level needed to generate equilibrium national income at full employment without inflation.