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 Equilibrium Aggregate Output (Income) The Saving/Investment Approach to Equilibrium & Adjustment to Equilibrium

Another way to look at this position of equilibrium is the following: since income must be either consumed or saved, Y is identical to C + S. In equilibrium, Y = C + I. Substituting for Y in the equation, we learn that in equilibrium:

C + S = C + I

and subtracting C from both sides leaves us with another equilibrium condition:

S = I

This is illustrated in the figure below:

Saving is sometimes described as a leakage out of the spending stream (funds that are saved are not spent by the household). But saving funds investment; the funds that consumers (for example) deposit in banks are lent by banks. So the funds come back into the economy as an injection called investment. In equilibrium, the leakage is equal to the investment.

For this reason, the saving/investment approach to equilibrium is also called the leakages/injections approach.