Determinants of Equilibrium Income

Equilibrium income is the level of output where aggregate demand (AD) equals aggregate supply (AS). The level of equilibrium income is determined by the following factors:

1. Aggregate Demand (AD)
Aggregate demand is the total amount of goods and services demanded in an economy at a given price level. The level of AD determines the equilibrium level of income in the economy. If AD is high, the equilibrium level of income will be high, and if AD is low, the equilibrium level of income will be low.

2. Aggregate Supply (AS)
Aggregate supply is the total amount of goods and services that firms in an economy are willing and able to produce at a given price level. The level of AS also affects the equilibrium level of income. If AS is high, the equilibrium level of income will be high, and if AS is low, the equilibrium level of income will be low.

3. Investment
Investment is a major component of AD. It includes the purchase of capital goods, such as machinery and equipment, and the construction of new buildings. Investment increases the level of AD, which in turn increases the equilibrium level of income.

4. Consumption
Consumption is the largest component of AD. It includes the purchase of goods and services by households. If consumption increases, the level of AD increases, which in turn increases the equilibrium level of income.

Conclusion

In summary, the level of equilibrium income is determined by the interaction of AD and AS. Investment and consumption also affect the level of AD and therefore the equilibrium level of income.

The correct answer is A