Question

The income-expenditure model illustrates when what is out of balance or inefficient?

A) levels of output or national income

B) net exports

C) price levels

Answer 1

Option A is correct - levels of output or national income

The income-expenditure model is a macroeconomic model that shows the equilibrium at the level of GDP where the aggregate demand equals the aggregate supply of the economy. This model was given by Keynes.

Aggregate expenditure is affected by 4 components which are consumption expenditure, investment expenditure, government expenditure, and net exports. Aggregate supply is affected by the factors that affect production in a country like prices of raw materials, wages, availability of raw materials, etc.

Thus, any variation in the equilibrium when either AS>AD or AD>AS leads to inefficiency in the economy which either leads to inflationary gap or deflationary gap in the economy.

Thus income-expenditure method illustrates when the level of output or national income is out of order or inefficient.