Full AE model

Question 1

what is the AE formula

Answer 1

AE = C + Ip + G + (X-M)

Question 2

when is AE in equilibrium

Answer 2

at the income level in which AE = GDP (45 degree line)

all production is sold and there are no changes in invetories

Question 3

what happens if income levels are below that of equilibrium

Answer 3

AE > output = inventories fall, firms hire more resources to increase output until it equals AE
this will reach eql

Question 4

what happens if income levels are above that of equilibrium

Answer 4

AE < output = inventories rise so firms reduce production so output falls to AE = eql