Page 52 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 3: Theories of Income, Output and Employment: Classical Theory

Figure 3.13 Notes

Y
Real
R/I S

r E
1 2

r E
2 1 I
2
I
1
X
O I I S, I
1 2

Figure 3.14

Y
Real
R/I

S

r
1 E
1
r E
2 2 I
I

X
O I I S, I
2 1
To show that if the capital market is in equilibrium the product market is also in equilibrium;
the capital market equilibrium ensures the product market equilibrium by equalizing leakages
(saving) from and injections (investments) into the spending stream. We can show that if saving
equals investment at the full employment level of output, then AD must equal AS. It is assumed
that there is no government and no foreign trade. Let the subscript 'f' denote full employment.

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