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Income Garnishment
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Income Taxes

How equilibrium income in a closed economy is determined?


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2011-09-12 23:25:43
2011-09-12 23:25:43

There is equilibrium in a closed economy (that which doesn't encourage in international trade), when there is the circular flow of income between House-holds & firms, where the house-holds own the factors of production, which is given to firms, which in return gives factors of income for their services. the firm uses fatcors of production to produce goods & services, whereas house-holds consume goods & services using factors of production. Here NI=NO=NE.

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This is determined by the distribution of income in the society.

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the quantities and prices of the resources that households supply.

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The economy is no longer closed and all other assumptions hold.

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you first have to culculate equilibrium level of income.

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Equilibrium level of income is solved by following a system of equations. For a detailed understanding, study the Law of Mass Action of chemical reactions.


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