# keynesian model of income determination notes

That is Total income(Y) = Total expenditure (AD). Overview Of Keynesian Income And Expenditure Model Economics Essay Introduction: Keynesian economic theory has been named after a British, John Maynard Keynes (1883 – 1946). However, it is not true in practical situations. 100, the consumption expenditure is Rs. Δy reaches to zero. 200 billion, which represents the national income of the economy. Figure-6 demonstrates the shift in national income due to shift in equilibrium point and AD schedule: In Figure-6, C + I schedule represents the initial AD schedule. The process of determination of equilibrium level of national income will become clear if we use simple algebra. The two types of multiplier are explained in the following points: Refers to a multiplier in which it is assumed that the change in investment and income are simultaneous. The exogenous variables are those fixed, given conditions that comprise the environment in which the system works. The aggregate demand is the sum total of all such spending. Hence the aggregate demand function is represented as, AD = C+ I + G + (X-M) ........... (1), This function shows that the aggregate demand is equal to the sum of expenditure respectively on consumption (C), Investment (I), Government spending (G) and net exports (X-M). For example, in Figure-6, the shift in the equilibrium position from E1 to E2 is the result of change in investment (ΔI) without any time lag. 64 (=80*0.8). On the other hand, the four-sector model contains households, businesses, government, and foreign sector.Let us discuss these three types of models of income determination given by Keynes. A comparison of the classical and the Keynesian models of income determination are given below: The classical and the Keynesian models, given above in the notational form, refer to the working of the macro – level economic system in three markets, i.e. Investment depends upon the marginal efficiency of capital and the rate of interest. Aggregate supply is the total of commodities supplied in the economy. Loanable funds theory (Neo - classical theory) of Interest, Liquidity preference theory (Keynesian theory) of interest, Keynesian Theory Aggregate Demand : Consumption Function, Keynesian Theory Aggregate Demand : Inducement to invest (Investment function), Rate of interest: Liquidity Preference Theory. It is also called comparative static multiplier, simultaneous multiplier, logical multiplier, timeless multiplier, and lagless multiplier. Privacy Policy3. For example suppose Mr. A earns Rs. If government is there, it does not have any role to play in the economic activity of a country. In the SKM the condition for equilibrium can be expressed as: Y = E – (1) The two-sector model of economy involves households and businesses only, while three-sector model represents households businesses, and government. The value of multiplier depends upon the rate of MPC. ... Keynesian theory of income determination. Y = AD = C+ I + G + (X-M) or Y = C+ I + G + (X-M) Keynes gives all attention to the ADF. 200 billion is the equilibrium point for the two-sector economy. These two methods of income determination are classified as income-expenditure approach and saving- investment approach. According to Figure-6, at equilibrium point E1, the national income is as follows: By substituting the value of C in the equation of national income at point E1, we get: Similarly, at equilibrium point E2, the national income would be: ΔY = 1/1-b (a + I + ΔI ) – Y2 = 1/1-b (a + I). Therefore, the AD can be represented by the following formula: Therefore, AD schedule is also termed as C+I schedule. Keynesians believe consumer demand is the primary driving force in an economy. Let us determine the relationship between change in national income (ΔY) and change in investment (ΔI) by understanding the concept of multiplier given below. Generally as compared to developed countries rate of MPC is higher in developing countries or less developed countries. Therefore, Rs. The schedule curve after point E represents that the AS is greater than AD (AS > AD). The additional income continues to produce till the value of change in income. Before representing the relationship between AS and AD on a graph, let us understand these two concepts in detail. Anchal Tomar. All the important topics will be discussed in detail and would be helpful for aspirants preparing for the CA exam. Refers to the fact the theory of multiplier is based on an assumption that additional income earned by individuals as a result of some autonomous investment is spent on the consumption of goods and services only which is not the real concept. Traditionally, in the Keynesian cross model, nominal national output/national income was plotted on the horizontal axis. The concept of multiplier can be understood by determining the relationship between change in national income (ΔY) and change in investment (ΔI). As a result, the theory supports the expansionary fiscal policy. According to Keynes, the level of employment depends on total demand and unemployment results as a consequence of a fall in total demand. As a result, businesses would have a pile of unsold stocks. For understanding the impact of shift in AD schedule on equilibrium point, let us assume that the AD schedule is showing an upward shift due to a permanent upward shift in the investment schedule. 100 then the aggregate demand is Rs. He pays money to the creditor, Mr. B of his contract. The Keynesian AS curve is drawn based on an assumption that total income is equal to total expenditure. In a two-sector economy, a shift in AD schedule occurs due to a shift in consumption or investment schedule or in both, simultaneously.

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