Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which factors determine national income equilibrium?

1. Government intervention and monetary policy

2. Aggregate supply and aggregate demand curves

3. Consumer spending patterns

4. Business investment levels

The correct answer is: Aggregate supply and aggregate demand curves

The determination of national income equilibrium is fundamentally influenced by the interaction between aggregate supply and aggregate demand. National income equilibrium occurs at the level of output where the total quantity of goods and services produced (aggregate supply) is equal to the total quantity of goods and services demanded (aggregate demand). When these two curves intersect, it signifies a balance in the economy—no excess supply or demand exists, and all resources are utilized efficiently. At this point, the national income reflects the economy's potential and is neither rising nor falling; hence, it indicates stability in economic activity. Factors such as government intervention, consumer spending, and business investment, while they impact national income, do not determine equilibrium in the same direct and systematic way as the interaction of aggregate supply and demand. These elements can shift the curves, but the equilibrium itself is established at the point where these curves meet. Understanding this key concept is crucial for analyzing economic fluctuations and the overall health of an economy.