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When at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final goods or product in market reaches its equilibrium. Aggregate demand for final goods consist of ex-ante consumption, ex-ante investment, government spending etc. The rate of increase in ex-ante consumption due to a unit increase in income is called marginal propensity to consume.

Equilibrium in product market achieved when.

Solution

Correct Option: 1

The passage states that when aggregate demand for final goods equals aggregate supply of final goods, the product market reaches equilibrium. So the equilibrium condition is AD = AS. If AD > AS or AD < AS, there is disequilibrium (excess demand or excess supply respectively).

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