The equilibrium level of national income is the point where aggregate demand (AD) equals aggregate supply (AS). At this level, total planned spending matches the value of goods produced, meaning there is no economic pressure for income levels to change.

Key features of equilibrium:

• AD = AS: When these are equal, there are no unintended changes in business inventories.
• If AD > AS: Inventory levels drop unexpectedly, prompting firms to increase production, which causes national income to rise.
• If AD < AS: Goods pile up as unplanned inventory, leading firms to reduce production, which causes national income to fall.
• Employment status: Equilibrium does not always mean full employment. An economy can be in equilibrium while still experiencing unemployment.
• 45-degree line diagram: Equilibrium is found where the total spending line (C + I + G + X – M) crosses the 45-degree line (where consumption equals income).
• Stability: If income moves away from this point, market forces naturally work to pull it back toward equilibrium.
• Economic shifts: Any change in spending components (Consumption, Investment, Government spending, or Net Exports) will shift the equilibrium level of national income.
• Output gap: The difference between the actual equilibrium level and the full employment level is known as the output gap (either inflationary or deflationary).