Q.Why must the equilibrium level of national income found using the Y=C+I approach always be identical to the equilibrium found using the S=I approach, for the same underlying consumption function and investment figure?
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Start your 14-day free trial to unlock the full solution →The two apparent "approaches" to finding equilibrium income are not actually two DIFFERENT economic conditions — they are the SAME single condition, algebraically rearranged.
Starting from the equilibrium condition:
Subtract from both sides:
But by the basic income identity, (saving is, by definition, whatever part of income is not consumed). Substituting this definition directly into the left-hand side above:
This derivation shows that the condition is obtained from the condition purely through simple algebraic rearrangement and the DEFINITION of saving — no new economic assumption has been introduced anywhere in this step. Consequently, ANY value of Y that satisfies will, by this exact chain of algebra, automatically also satisfy , and vice versa — the two conditions have EXACTLY the same solution set, which for a single linear equation in Y means exactly the same single equilibrium value. …
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