Multiple choice

The essential condition of equilibrium in a two sector model is

  1. taxes = government expenditure

  2. saving = investment

  3. export = import

  4. aggregate income and aggregate expenditure could be equal
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

In a simplified two-sector economy (households and firms only), equilibrium occurs where aggregate savings equal aggregate investment. This ensures that all income not consumed by households is channeled back into production through firms' investment spending. The other options involve government or foreign sectors which don't exist in a pure two-sector model.

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