Equilibrium in the Market for Goods and Services: The Supply and Demand for the Economy’s Output

The demand for the economy’s output comes from consumption, investment,
and government purchases. Consumption depends on disposable income; invest-
ment depends on the real interest rate; and government purchases and taxes are
the exogenous variables set by fiscal policymakers.
To this analysis, let’s add what we learned about the supply of goods and ser-
vices in Section 3-1. There we saw that the factors of production and the pro-
duction function determine the quantity of output supplied to the economy:

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