Equilibrium Domestic Production in an Open Economy
(Figure 22.1)

In the two graphs on the left, we can show the equilibrium level of domestic production and income as well as the saving-investment equilibrium. In the top panel, domestic production and aggregate demand coincide at the point A. Press the highlight point A button to highlight the equilibrium on the graph.
Why is that the equilibrium? The equilibrium occurs where the AD curve crosses the 45-degree line. At levels of domestic production below 100 (press Below 100 now), aggregate demand would exceed domestic production. As a result, inventories would be depleted and firms would increase production, incomes would rise, and the economy would move towards A. At levels of production above 100 (press Above 100 now), insufficient aggregate demand would lead to increased inventories. As a result, firms would cut back production and the economy would move back towards A.
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