Question : In the aggregate expenditure model, equilibrium occurs when aggregate expenditure is equal to:
Option 1: Consumption expenditure
Option 2: Investment expenditure
Option 3: Government expenditure
Option 4: Net exports
Correct Answer:
Consumption expenditure
Solution : The correct answer is (a) consumption expenditure.
The aggregate expenditure model is based on the idea that the total spending in an economy (aggregate expenditure) determines the level of real GDP.
Equilibrium occurs when aggregate expenditure (AE) is equal to real GDP (Y). In the model, consumption expenditure is considered the largest component of aggregate expenditure. Therefore, at equilibrium, aggregate expenditure is equal to consumption expenditure: AE = C.
This is because in equilibrium, total spending in the economy matches the total output of goods and services, implying that consumers are spending all of their disposable income on consumption, without any unintended inventory accumulation or depletion.
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