My textbook says Y = AE, then it says "when Y > AE, Y must fall". how can this be possible?
i always thought they were the same...
Answer:
No. Y stands for aggregate income - what households really receive, or alternatively, what firms actually produce.
AE stands for aggregate spending, what households PLAN to spend.
Y = AE is a statement of a condition for the macroeconomy to be in equilibrium. It is not a statement of fact; it is true only at equilibrium. So Y > AE implies that the amount of planned spending is below what is being sold (not equilibrium, but possible). Similarly Y < AE implies that the amount of planned spending exceeds what is being sold (not an equilibrium, also possible). Y adjusts in either case closer to AE leading to equilibrum.
it is just saying that the forces will force Y to drop to equal AE in the cases where for some reason Y exceeds AE ( temporarily).
That's sure, Y must fall.
Take a mechanical balance, Put some weight on its both sides equally. Take left side as "Y" and right side as "AE". Now increase some weight on left side. That is Y>AE. Definitely "Y" must fall.
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