Economists often say that the economy is like a bathtub filling up – the level of the water in the bath will rise when the volume of w… The aggregate supply of goods of an economy depends on its productive capacity which in turn depends stock of capital, labour arid the levels of their productivity. It is well known that disposable income is partly spent on consumption goods and partly saved; so whatever is not spent is automatically saved. Many have filed for bankruptcy, with an ... Identifying Speculative Bubbles and Its Effect on Markets Speculation plays an interesting role in economics and one that drastically affects markets. This becomes clear from the fact that increase in Y, i.e., ΔY = (Y1 – Y0) exceeds the in­crease in investment ΔI = I1, – I0. Desired expenditure, C + I would then exceed actual output. Thus according to Keynes there is not such thing as ‘automatic full employment’ as has been postulated by the classical economists. It is possible that short-run equilibrium, where AD equals SRAS, is greater than the economy’s potential at its LRAS. Thus the expression for equilibrium has two parts: Y̅ = (autonomous expenditure multiplier) x (autonomous expenditure) … (14). Privacy Policy3. 100 crores. 20 crores would accumulate in each period. At any income above the equilibrium, desired saving exceeds desired investment and national in­come falls for an exactly opposite reason. In the SKM, there are two items of autonomous spending, viz., investment and government expenditure. As a result the aggregate de­mand schedule shifts up ex­actly by the same amount, from C + I0 + G0 to C + I + G0. 500 crores, which is just enough to buy the current output (GNP) of Rs. National income, (GNI) or national output (GNP) is the total output available to satisfy peoples wants. The first term, 1/(1 – b) is called the autonomous expenditure multiplier. The excess of injection over leakage exerts an expansionary pressure on national income. See Table 1. This is so because all investment is autonomous and thus independent of income. The Keynesian theory of income determination is based on two assumptions: (a) Wages and price are rigid. This is how the multiplier process is initiated by the initial disturbance created by investment change. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. To be more specific, the theory of income determination seeks to find out the equilibrium level (value) of national income. It shows that the equilibrium level of national income occurs where the aggregate expendi­ture function intersects the 45° line. 1 illustrates how the equilibrium level of national income is arrived at by using the income-expenditure approach. This is because a ... Externalities Question 1 A steel manufacturer is located close to a large town. Since, in Keynes’ model, firms are assumed to produce sufficient output to meet current demand, they will be inclined to produce more. Thus the simplest way to find out the equilibrium value of national income in Keynes’ two-sector demand-determined model is to divide the fixed level of autonomous investment by the MPS which is 1- MPC.

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