Answer to Question #326660 in Macroeconomics for Kritika

Question

Explain the determination of equilibrium level of GDP using the aggregate expenditure approach and the savings investment approach in a two sector model. Do you think that equilibrium will always occur at full employment level of output?

Answer 1

Equilibrium GDP through spending is achieved through the combination of private spending, government spending, investment, and net exports. In a two-sector model, the balance of GDP will be achieved through the equality of savings and investment. At full employment, production will also be in equilibrium, because at full employment, unemployment will be at the natural rate, thus through the Phillips curve, the natural rate of unemployment will mean a stable rate of inflation. This gives, through the law of aggregate demand, GDP at the natural level