Author: Lori Alden
(rhymes with brains) argued that macroeconomic equilibrium
occurs when spending is equal to output.
see why, recall that equilibrium is a state in which there is no
tendency to change.
Suppose that spending is less than output, or that purchasers
aren't willing to buy all of the output that firms are producing.
When this happens, firms are left with unsold merchandise, which
makes them reduce their output.
spending is instead greater than output, purchasers must be buying
more output than firms are producing.
Firms would quickly discover that their storerooms were
running out of products and increase output.
or falling output exhibits a "tendency to change" that
tells us that the economy is not in equilibrium.
Clearly, equilibrium can occur only when spending equals
output. Only then are
firms satisfied with the amount of output they're producing.
Spending is made up of these components: consumption,
investment, government spending, and net exports. Spending
will rise if consumption, investment, government spending, or
exports go up, or if imports go down.
It falls if consumption, investment, government spending, or
exports go down, or if imports go up.
In the simple Keynesian model, spending is what determines the
level of output or GDP. Output passively rises or falls to
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