Determination of Income and Employment
Investment and aggregate demand
Write AD and the equilibrium condition for a given economy.
Investment is spending that adds to physical capital (machines, buildings) and inventories. In this simple model, investment is autonomous: a fixed amount, I = Ī, that does not depend on income.
Aggregate demand (AD) is total planned spending. In a two-sector economy (households and firms):
AD = C̄ + Ī + cY = A + cY, where A = C̄ + Ī is total autonomous spending.
The economy is in equilibrium when planned output equals planned demand: Y = A + cY. This is a condition about plans, not the accounting identity of Chapter 2 (which always holds for actual values).
If planned demand is less than planned output, firms cannot sell everything, and unintended inventories pile up. They then cut output. If demand is more than output, inventories run down, and firms raise output.
With a government, spending G is added, and households can consume only from disposable income, Yd = Y − T (income after taxes). Then: Y = C̄ + Ī + G + c(Y − T).
Example: C̄ = 30, Ī = 20, c = 0.75. A = 50, so AD = 50 + 0.75Y, and equilibrium needs Y = 50 + 0.75Y.
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