The economy, as shown in the diagram, is in equilibrium at point E on the 45º line. The equilibrium level of output is OM, whose aggregate demand (desired level of spending) is equal to the level of output. C + I or aggregate demand curve is upward sloping with a positive intercept. If the economy is beyond OM output (OM1 ) the aggregate demand line (C + I curve) will be below the 45º line which implies that the planned spending in less than the planned output. As a result, the rise in inventory will lead to reduction in employment and output which will continue up to equilibrium level of output. On the other hand if the economy is at a lower level (OM2 ) the C+I line will lie above 45º line. As a result, the inventory will decrease leading to expansion in employment and output till the equilibrium level in attained. This is how the equilibrium will be maintained permanently.
