The document discusses the concepts of equilibrium income, excess demand, deficient demand, and the multiplier effect in Keynesian economics. It provides definitions and diagrams to illustrate:
1) Equilibrium income is determined by the point where aggregate demand (AD) equals aggregate supply (AS). The economy can be at full employment, under-employment, or over-employment.
2) Excess demand occurs when AD is greater than AS at full employment, leading to inflation. Deficient demand is when AD is less than AS, resulting in under-employment.
3) The investment multiplier shows how a initial change in investment causes a multiplied change in equilibrium income through subsequent rounds of spending. A higher multiplier coefficient corresponds to
1. The document discusses key concepts related to aggregate demand, aggregate supply, and their components. It defines aggregate demand as the total expenditure on final goods and services in an economy, and identifies its main components as private consumption, investment, government expenditure, and net exports.
2. Aggregate supply is defined as the total production of goods and services in an economy. Its main components are consumption and savings. The relationship between consumption, income, and savings is also explained using consumption and savings functions.
3. Important concepts like average propensity to consume, marginal propensity to consume, and their properties are summarized. The relationship between different macroeconomic variables like income, consumption, savings, aggregate demand, and aggregate supply
Measurement of equilibrium level of national incomeShiva Jaiswal
The equilibrium level of national income is reached when aggregate demand equals aggregate supply. Aggregate demand includes both consumer demand and producer demand. Similarly, aggregate supply includes both consumption goods and investment goods produced. Equilibrium occurs at the level of income where total goods demanded equals total goods supplied, so that there is neither excess supply nor shortage. According to the Keynesian view, savings and investment may not always be equal since they are undertaken by different economic agents and their decisions may differ. Equilibrium is characterized by equality between real savings and real investment.
This document discusses key concepts in macroeconomics including aggregate demand, consumption, investment, aggregate supply, and the equilibrium level of national income. It defines consumption and investment demand, presents the consumption function, and shows how aggregate demand is determined by adding consumption and investment. The aggregate supply curve is derived from the production function. Equilibrium occurs where aggregate demand equals aggregate supply. The multiplier effect and how changes in investment affect the equilibrium level of national income are also examined.
This document discusses the concept of equilibrium level of national income. It provides three main methods to measure national income - the product method, income method, and expenditure method. It explains that equilibrium occurs when aggregate demand (AD) equals aggregate supply (AS). The document uses a table to illustrate different scenarios when AD is greater than, less than, or equal to AS, and whether the economy is in a state of expansion, contraction, or equilibrium. It also gives examples of how governments may intervene to maintain equilibrium, such as by controlling consumption or subsidizing prices. Finally, it notes that while the Keynesian model shows savings equal to investment at equilibrium, this perfect equality does not always hold in reality due to differences between real and
This document discusses key concepts in economics related to income determination, including MPC, MPS, APC, APS, consumption functions, and the AD-AS approaches. It provides examples and solutions to calculate these values based on income and consumption data. It also reviews investment functions, full employment, and definitions of related economic equilibrium states.
Cu m com-mebe-mod-i--select questions without answersDr. SUBIR MAITRA
1. The document discusses questions related to national income accounting and the Keynesian model. It provides data for 11 questions related to calculating national income measures like GNP, NNP, GDP, consumption, investment, exports and imports. It also provides structural equations to calculate equilibrium income and the effects of changes in government spending, taxes and money supply in a closed economy.
The document provides an overview of key economic concepts including:
1) Economics is defined as the study of how people use limited resources to fulfill unlimited wants. It involves choices under scarcity.
2) Microeconomics studies individual units like households and firms. Macroeconomics looks at the whole economy in terms of outputs, prices, and employment.
3) The production possibilities frontier (PPF) curve shows the maximum combinations of two goods an economy can produce with full employment of resources. Points inside the curve are attainable but inefficient, while points outside are unattainable.
This document discusses the determination of national income through aggregate expenditure and the relationship between aggregate expenditure, national output, and equilibrium income. It defines aggregate expenditure as the total planned spending in an economy by households, firms, government, and foreigners. Equilibrium income is reached when aggregate expenditure and national output are equal. The multiplier effect is explained as how a change in autonomous investment results in a multiplied change in equilibrium income. The paradox of thrift is also introduced, where attempting to increase savings can reduce overall equilibrium income in an economy.
1. The document discusses key concepts related to aggregate demand, aggregate supply, and their components. It defines aggregate demand as the total expenditure on final goods and services in an economy, and identifies its main components as private consumption, investment, government expenditure, and net exports.
2. Aggregate supply is defined as the total production of goods and services in an economy. Its main components are consumption and savings. The relationship between consumption, income, and savings is also explained using consumption and savings functions.
3. Important concepts like average propensity to consume, marginal propensity to consume, and their properties are summarized. The relationship between different macroeconomic variables like income, consumption, savings, aggregate demand, and aggregate supply
Measurement of equilibrium level of national incomeShiva Jaiswal
The equilibrium level of national income is reached when aggregate demand equals aggregate supply. Aggregate demand includes both consumer demand and producer demand. Similarly, aggregate supply includes both consumption goods and investment goods produced. Equilibrium occurs at the level of income where total goods demanded equals total goods supplied, so that there is neither excess supply nor shortage. According to the Keynesian view, savings and investment may not always be equal since they are undertaken by different economic agents and their decisions may differ. Equilibrium is characterized by equality between real savings and real investment.
This document discusses key concepts in macroeconomics including aggregate demand, consumption, investment, aggregate supply, and the equilibrium level of national income. It defines consumption and investment demand, presents the consumption function, and shows how aggregate demand is determined by adding consumption and investment. The aggregate supply curve is derived from the production function. Equilibrium occurs where aggregate demand equals aggregate supply. The multiplier effect and how changes in investment affect the equilibrium level of national income are also examined.
This document discusses the concept of equilibrium level of national income. It provides three main methods to measure national income - the product method, income method, and expenditure method. It explains that equilibrium occurs when aggregate demand (AD) equals aggregate supply (AS). The document uses a table to illustrate different scenarios when AD is greater than, less than, or equal to AS, and whether the economy is in a state of expansion, contraction, or equilibrium. It also gives examples of how governments may intervene to maintain equilibrium, such as by controlling consumption or subsidizing prices. Finally, it notes that while the Keynesian model shows savings equal to investment at equilibrium, this perfect equality does not always hold in reality due to differences between real and
This document discusses key concepts in economics related to income determination, including MPC, MPS, APC, APS, consumption functions, and the AD-AS approaches. It provides examples and solutions to calculate these values based on income and consumption data. It also reviews investment functions, full employment, and definitions of related economic equilibrium states.
Cu m com-mebe-mod-i--select questions without answersDr. SUBIR MAITRA
1. The document discusses questions related to national income accounting and the Keynesian model. It provides data for 11 questions related to calculating national income measures like GNP, NNP, GDP, consumption, investment, exports and imports. It also provides structural equations to calculate equilibrium income and the effects of changes in government spending, taxes and money supply in a closed economy.
The document provides an overview of key economic concepts including:
1) Economics is defined as the study of how people use limited resources to fulfill unlimited wants. It involves choices under scarcity.
2) Microeconomics studies individual units like households and firms. Macroeconomics looks at the whole economy in terms of outputs, prices, and employment.
3) The production possibilities frontier (PPF) curve shows the maximum combinations of two goods an economy can produce with full employment of resources. Points inside the curve are attainable but inefficient, while points outside are unattainable.
This document discusses the determination of national income through aggregate expenditure and the relationship between aggregate expenditure, national output, and equilibrium income. It defines aggregate expenditure as the total planned spending in an economy by households, firms, government, and foreigners. Equilibrium income is reached when aggregate expenditure and national output are equal. The multiplier effect is explained as how a change in autonomous investment results in a multiplied change in equilibrium income. The paradox of thrift is also introduced, where attempting to increase savings can reduce overall equilibrium income in an economy.
There are two approaches to determining the equilibrium level of income and employment in an economy according to Keynesian theory: the aggregate demand-aggregate supply (AD-AS) approach and the saving-investment (S-I) approach. Equilibrium is achieved under both approaches when planned aggregate demand equals planned aggregate supply or when planned saving equals planned investment. Deviations from equilibrium will trigger adjustments through changes in output and employment that bring the economy back to equilibrium. Key assumptions include a two-sector model of households and firms, autonomous investment, a fixed price level, and analysis in the short-run context.
Cu m com-mebe-mod-i-multiplier theory-keynesian approach-lecture-1Dr. Subir Maitra
1) The Simple Keynesian Model (SKM) is used to analyze business cycles and fluctuations in economic activity. It assumes prices are fixed in the short-run and demand determines output.
2) The SKM equilibrium occurs when actual expenditure (aggregate supply) equals planned expenditure (aggregate demand). This is shown as the point where the 45-degree aggregate supply line intersects the aggregate demand line.
3) In a closed economy without government, aggregate demand consists of consumption (C) and investment (I). Equilibrium income is determined by the consumption function C=C0+cY and investment function I=I0.
1. The document provides an overview of the Solow growth model, which shows how capital accumulation, labor force growth, and technological advances interact in an economy and affect total output.
2. It examines how the model treats the accumulation of capital over time and how savings, depreciation, population growth, and technological progress influence the long-run capital stock and output.
3. The model predicts that economies with higher savings rates or population growth rates will reach different steady-state levels of capital and output per worker.
The document defines key macroeconomic concepts including aggregate expenditure, output, income, consumption, saving, investment, government spending, taxes, imports, exports, and equilibrium. It also discusses the consumption function, marginal propensity to consume, marginal propensity to save, and the multiplier effect.
The Harrod-Domar model of economic growth extends Keynesian analysis to the long run by considering the dual effects of investment on aggregate demand and productive capacity. It seeks to determine the unique growth rate of investment and income needed to maintain full employment. The Domar version presents a fundamental growth equation showing that the increase in national income depends on the increase in capital stock multiplied by the marginal output-capital ratio. Harrod's model treats growth more dynamically, with the warranted growth rate determined by the population growth rate, output per capita based on investment level, and capital accumulation. Equilibrium is achieved when the actual incremental capital-output ratio equals the required ratio warranted by technology.
The document discusses key concepts related to determining national income, including:
1) The circular flow of income between producers, consumers, and factors of production.
2) The equilibrium level of national income is reached when total injections (spending) equals total withdrawals (saving) in the economy.
3) Fiscal policy tools like changes in government spending and taxation can be used to reduce inflationary or deflationary gaps between the actual and full employment levels of national income.
The Harrod-Domar growth model uses 3 key variables to determine the growth rate:
1. The saving rate, which determines how much can be invested.
2. Capital productivity, or how much output increases with each unit of new capital.
3. The depreciation rate, which accounts for aging of the existing capital stock.
The model's formula is: Growth Rate = Saving Rate x Capital Productivity - Depreciation Rate. It provides a simple framework for analyzing how changes to these variables impact long-term economic growth.
The document discusses several economic growth models:
1) The Harrod-Domar model which expanded Keynesian analysis to the long-run and analyzed investment's role in creating output capacity.
2) The Roy Harrod and Evsey Domar models which also expanded Keynesian analysis and emphasized investment's dual role of generating income and increasing productive capacity.
3) The Solow growth model which views capital accumulation and labor as the drivers of economic growth assuming full employment and perfect competition. Technological progress is treated as exogenous.
4) The Meade model which incorporates natural resources and technological progress as additional factors influencing economic growth.
This document provides an overview of the AK model of endogenous economic growth. It discusses how the AK model addresses limitations of previous exogenous growth models. The key aspects of the AK model are:
- It models economic output as a linear function of capital stock, without diminishing returns to capital.
- This allows for perpetual long-run growth, unlike exogenous models which predict convergence to a steady state.
- The growth rate depends on savings rate and the level of technology, represented by the parameter A. Improvements in A can permanently increase the growth rate.
The document summarizes key aspects of the Solow growth model. It explains that the Solow model replaced the fixed production function of the Harrod-Domar model with a neoclassical production function allowing for factor substitution. It presents the basic equations of the Solow model showing that changes in capital per worker are determined by savings, population growth, and depreciation. It illustrates the Solow diagram and how steady state equilibrium is reached. It analyzes how changes in the saving rate and population growth rate impact the model.
1) The simple growth model contains 5 main equations that relate key economic variables like investment, saving, capital stock, labor force, and output.
2) The aggregate production function shows that total output is a function of capital stock and labor force. As capital stock and labor increase, output will also increase.
3) Saving is determined by the saving rate multiplied by total income. Investment is equal to saving in a closed economy where saving must be used for investment or consumption.
The Harrod-Domer model theorizes that a country's economic growth rate is defined by its savings level and capital-output ratio. It suggests there is no natural balanced growth. The model was developed independently by Roy Harrod and Evsey Domar to explain growth in terms of savings and capital productivity. It requires continuous net investment to sustain real income and production growth. The model's assumptions include no government intervention, full initial employment, a closed economy, fixed capital-labor ratios and constant savings and interest rates. Its main criticism is the unrealistic assumption of no reason for sufficient growth to maintain full employment.
CU M Com-MEBE-Mod-I-National Income Accounting-Lecture-3Dr. Subir Maitra
This document provides sample problems and explanations related to national income accounting concepts. It begins with 16 questions asking students to explain or demonstrate concepts like gross domestic product, national income, value added, the basic macroeconomic identity for an open economy, and deriving personal income from national income. It then provides sample numerical problems demonstrating how to calculate GDP, NDP, NI and other measures using the value added, income and expenditure methods. It concludes with abbreviations commonly used in national income accounting.
The document summarizes concepts related to economic growth calculation and analysis. It explains how to calculate growth rates using formulas that relate the current and future values of income given a growth rate over time. It also discusses how small differences in growth rates, like 1% vs 2%, can lead to large differences in income levels over many years. The document then covers factors that influence economic growth like capital accumulation, productivity increases, savings, investment, and production functions. It introduces the concept of total factor productivity (TFP) in analyzing sources of economic growth.
This chapter discusses profit maximization and competitive supply. It outlines the assumptions of perfect competition including price taking, product homogeneity, and free entry and exit. It explains that in the short run, firms maximize profits by producing where marginal revenue equals marginal cost. The chapter defines marginal revenue and marginal cost and shows how firms determine their profit-maximizing output level. It introduces the concepts of the competitive firm's short-run supply curve and the market supply curve in the short run. The chapter also discusses how firms and markets respond to changes in input prices or market conditions.
I am Ryan J. I am a Macroeconomics Homework Helper at economicshomeworkhelper.com/. I hold a PhD in M.S. Economics, University of Maine. I have been helping students with their homework for past 7 years. I solve assignments related to Macroeconomics Assignment.
Visit economicshomeworkhelper.com or email info@economicshomeworkhelper.com .
You can also call on +1 678 648 4277 for any assistance with Macroeconomics homework help.
The Solow-Swan model assumes constant returns to scale in production using capital and labor. It predicts an economy will reach a steady state equilibrium where the savings rate equals the investment needed to maintain the capital-labor ratio. The key assumptions include diminishing returns to individual inputs, exogenous population growth and technological progress, and savings being a constant fraction of income. The model shows how an economy converges over time to this steady state level of capital per worker and output per worker, regardless of its starting point.
CU M Com-MEBE-MOD-I-National Income Accounting-Lecture-2Dr. Subir Maitra
The document discusses three methods for measuring national income:
1) Product method - Summing the value added of all sectors in the economy through production.
2) Income method - Summing incomes from factors of production like wages, profits, interest.
3) Expenditure method - Summing expenditures in the economy through consumption, investment, government spending, and trade. It shows how these methods are equivalent.
Equilibrium level of income is Rs. 320 Crore.
Q2. If in an economy, C = 100 + 0.8Y and I = 50 + 0.1Y. Calculate equilibrium
level of income.
Answer: AD = AS
C + I = Y
100 + 0.8Y + 50 + 0.1Y = Y
150 + 0.9Y = Y
150 = 0.1Y
Y = 150/0.1 = Rs. 1500 Crore
Theory of Income and Employment - Economics 12th ISC Refresher course.pptxHimaanHarish1
Exante demand, Ex post demand , Aggregate demand , Propensity to save and consume, Investment multiplier, Full employment , excess demand and excessive demand. Deficient demand.
Theory of Income and Employment - Economics 12th ISC Refresher course.pptxHimaanHarish
The document discusses key concepts in macroeconomics such as aggregate demand, aggregate supply, equilibrium output, and the multiplier effect. It defines ex-ante demand as planned demand and ex-post demand as actual demand. Aggregate demand is the total final expenditure and is affected by consumption, investment, government spending, and net exports. Equilibrium output occurs at the point where aggregate demand and supply intersect. The investment multiplier shows that a change in investment leads to a greater change in total income through subsequent rounds of spending.
The document discusses the economic concept of the multiplier. It provides three key points:
1) A multiplier measures how much an economic variable (like income or output) changes in response to a change in another variable (like investment or government spending). For example, a $100 increase in investment may lead to a $300 increase in income, so the multiplier is 3.
2) The multiplier captures the ripple effect of spending as income from the initial transaction is spent again and again in the economy. This leads to a larger increase in overall income than the initial change in spending.
3) The size of the multiplier depends on the marginal propensity to consume (MPC). A higher MPC means more
There are two approaches to determining the equilibrium level of income and employment in an economy according to Keynesian theory: the aggregate demand-aggregate supply (AD-AS) approach and the saving-investment (S-I) approach. Equilibrium is achieved under both approaches when planned aggregate demand equals planned aggregate supply or when planned saving equals planned investment. Deviations from equilibrium will trigger adjustments through changes in output and employment that bring the economy back to equilibrium. Key assumptions include a two-sector model of households and firms, autonomous investment, a fixed price level, and analysis in the short-run context.
Cu m com-mebe-mod-i-multiplier theory-keynesian approach-lecture-1Dr. Subir Maitra
1) The Simple Keynesian Model (SKM) is used to analyze business cycles and fluctuations in economic activity. It assumes prices are fixed in the short-run and demand determines output.
2) The SKM equilibrium occurs when actual expenditure (aggregate supply) equals planned expenditure (aggregate demand). This is shown as the point where the 45-degree aggregate supply line intersects the aggregate demand line.
3) In a closed economy without government, aggregate demand consists of consumption (C) and investment (I). Equilibrium income is determined by the consumption function C=C0+cY and investment function I=I0.
1. The document provides an overview of the Solow growth model, which shows how capital accumulation, labor force growth, and technological advances interact in an economy and affect total output.
2. It examines how the model treats the accumulation of capital over time and how savings, depreciation, population growth, and technological progress influence the long-run capital stock and output.
3. The model predicts that economies with higher savings rates or population growth rates will reach different steady-state levels of capital and output per worker.
The document defines key macroeconomic concepts including aggregate expenditure, output, income, consumption, saving, investment, government spending, taxes, imports, exports, and equilibrium. It also discusses the consumption function, marginal propensity to consume, marginal propensity to save, and the multiplier effect.
The Harrod-Domar model of economic growth extends Keynesian analysis to the long run by considering the dual effects of investment on aggregate demand and productive capacity. It seeks to determine the unique growth rate of investment and income needed to maintain full employment. The Domar version presents a fundamental growth equation showing that the increase in national income depends on the increase in capital stock multiplied by the marginal output-capital ratio. Harrod's model treats growth more dynamically, with the warranted growth rate determined by the population growth rate, output per capita based on investment level, and capital accumulation. Equilibrium is achieved when the actual incremental capital-output ratio equals the required ratio warranted by technology.
The document discusses key concepts related to determining national income, including:
1) The circular flow of income between producers, consumers, and factors of production.
2) The equilibrium level of national income is reached when total injections (spending) equals total withdrawals (saving) in the economy.
3) Fiscal policy tools like changes in government spending and taxation can be used to reduce inflationary or deflationary gaps between the actual and full employment levels of national income.
The Harrod-Domar growth model uses 3 key variables to determine the growth rate:
1. The saving rate, which determines how much can be invested.
2. Capital productivity, or how much output increases with each unit of new capital.
3. The depreciation rate, which accounts for aging of the existing capital stock.
The model's formula is: Growth Rate = Saving Rate x Capital Productivity - Depreciation Rate. It provides a simple framework for analyzing how changes to these variables impact long-term economic growth.
The document discusses several economic growth models:
1) The Harrod-Domar model which expanded Keynesian analysis to the long-run and analyzed investment's role in creating output capacity.
2) The Roy Harrod and Evsey Domar models which also expanded Keynesian analysis and emphasized investment's dual role of generating income and increasing productive capacity.
3) The Solow growth model which views capital accumulation and labor as the drivers of economic growth assuming full employment and perfect competition. Technological progress is treated as exogenous.
4) The Meade model which incorporates natural resources and technological progress as additional factors influencing economic growth.
This document provides an overview of the AK model of endogenous economic growth. It discusses how the AK model addresses limitations of previous exogenous growth models. The key aspects of the AK model are:
- It models economic output as a linear function of capital stock, without diminishing returns to capital.
- This allows for perpetual long-run growth, unlike exogenous models which predict convergence to a steady state.
- The growth rate depends on savings rate and the level of technology, represented by the parameter A. Improvements in A can permanently increase the growth rate.
The document summarizes key aspects of the Solow growth model. It explains that the Solow model replaced the fixed production function of the Harrod-Domar model with a neoclassical production function allowing for factor substitution. It presents the basic equations of the Solow model showing that changes in capital per worker are determined by savings, population growth, and depreciation. It illustrates the Solow diagram and how steady state equilibrium is reached. It analyzes how changes in the saving rate and population growth rate impact the model.
1) The simple growth model contains 5 main equations that relate key economic variables like investment, saving, capital stock, labor force, and output.
2) The aggregate production function shows that total output is a function of capital stock and labor force. As capital stock and labor increase, output will also increase.
3) Saving is determined by the saving rate multiplied by total income. Investment is equal to saving in a closed economy where saving must be used for investment or consumption.
The Harrod-Domer model theorizes that a country's economic growth rate is defined by its savings level and capital-output ratio. It suggests there is no natural balanced growth. The model was developed independently by Roy Harrod and Evsey Domar to explain growth in terms of savings and capital productivity. It requires continuous net investment to sustain real income and production growth. The model's assumptions include no government intervention, full initial employment, a closed economy, fixed capital-labor ratios and constant savings and interest rates. Its main criticism is the unrealistic assumption of no reason for sufficient growth to maintain full employment.
CU M Com-MEBE-Mod-I-National Income Accounting-Lecture-3Dr. Subir Maitra
This document provides sample problems and explanations related to national income accounting concepts. It begins with 16 questions asking students to explain or demonstrate concepts like gross domestic product, national income, value added, the basic macroeconomic identity for an open economy, and deriving personal income from national income. It then provides sample numerical problems demonstrating how to calculate GDP, NDP, NI and other measures using the value added, income and expenditure methods. It concludes with abbreviations commonly used in national income accounting.
The document summarizes concepts related to economic growth calculation and analysis. It explains how to calculate growth rates using formulas that relate the current and future values of income given a growth rate over time. It also discusses how small differences in growth rates, like 1% vs 2%, can lead to large differences in income levels over many years. The document then covers factors that influence economic growth like capital accumulation, productivity increases, savings, investment, and production functions. It introduces the concept of total factor productivity (TFP) in analyzing sources of economic growth.
This chapter discusses profit maximization and competitive supply. It outlines the assumptions of perfect competition including price taking, product homogeneity, and free entry and exit. It explains that in the short run, firms maximize profits by producing where marginal revenue equals marginal cost. The chapter defines marginal revenue and marginal cost and shows how firms determine their profit-maximizing output level. It introduces the concepts of the competitive firm's short-run supply curve and the market supply curve in the short run. The chapter also discusses how firms and markets respond to changes in input prices or market conditions.
I am Ryan J. I am a Macroeconomics Homework Helper at economicshomeworkhelper.com/. I hold a PhD in M.S. Economics, University of Maine. I have been helping students with their homework for past 7 years. I solve assignments related to Macroeconomics Assignment.
Visit economicshomeworkhelper.com or email info@economicshomeworkhelper.com .
You can also call on +1 678 648 4277 for any assistance with Macroeconomics homework help.
The Solow-Swan model assumes constant returns to scale in production using capital and labor. It predicts an economy will reach a steady state equilibrium where the savings rate equals the investment needed to maintain the capital-labor ratio. The key assumptions include diminishing returns to individual inputs, exogenous population growth and technological progress, and savings being a constant fraction of income. The model shows how an economy converges over time to this steady state level of capital per worker and output per worker, regardless of its starting point.
CU M Com-MEBE-MOD-I-National Income Accounting-Lecture-2Dr. Subir Maitra
The document discusses three methods for measuring national income:
1) Product method - Summing the value added of all sectors in the economy through production.
2) Income method - Summing incomes from factors of production like wages, profits, interest.
3) Expenditure method - Summing expenditures in the economy through consumption, investment, government spending, and trade. It shows how these methods are equivalent.
Equilibrium level of income is Rs. 320 Crore.
Q2. If in an economy, C = 100 + 0.8Y and I = 50 + 0.1Y. Calculate equilibrium
level of income.
Answer: AD = AS
C + I = Y
100 + 0.8Y + 50 + 0.1Y = Y
150 + 0.9Y = Y
150 = 0.1Y
Y = 150/0.1 = Rs. 1500 Crore
Theory of Income and Employment - Economics 12th ISC Refresher course.pptxHimaanHarish1
Exante demand, Ex post demand , Aggregate demand , Propensity to save and consume, Investment multiplier, Full employment , excess demand and excessive demand. Deficient demand.
Theory of Income and Employment - Economics 12th ISC Refresher course.pptxHimaanHarish
The document discusses key concepts in macroeconomics such as aggregate demand, aggregate supply, equilibrium output, and the multiplier effect. It defines ex-ante demand as planned demand and ex-post demand as actual demand. Aggregate demand is the total final expenditure and is affected by consumption, investment, government spending, and net exports. Equilibrium output occurs at the point where aggregate demand and supply intersect. The investment multiplier shows that a change in investment leads to a greater change in total income through subsequent rounds of spending.
The document discusses the economic concept of the multiplier. It provides three key points:
1) A multiplier measures how much an economic variable (like income or output) changes in response to a change in another variable (like investment or government spending). For example, a $100 increase in investment may lead to a $300 increase in income, so the multiplier is 3.
2) The multiplier captures the ripple effect of spending as income from the initial transaction is spent again and again in the economy. This leads to a larger increase in overall income than the initial change in spending.
3) The size of the multiplier depends on the marginal propensity to consume (MPC). A higher MPC means more
The document defines key macroeconomic concepts such as aggregate demand, aggregate supply, and their components. It discusses how equilibrium output is determined by the intersection of the aggregate demand and aggregate supply curves. The saving-investment approach to determining equilibrium is also covered, where equilibrium occurs at the point where planned saving equals planned investment. Factors that can cause excess demand and deficient demand are explained, along with their impacts and appropriate policy responses.
Approaches used in Measuring ational incomeNmanyabetrum
There are three main approaches to measuring national income: the income approach, expenditure approach, and product/output approach. The income approach adds up all incomes received, the expenditure approach adds up all expenditures, and the product approach measures the total value of final goods produced. National income is determined by factors such as technology, human capital, policies, resources, and market size. While per capita income measures average income, it does not fully capture living standards. National income equilibrium is reached when aggregate demand equals aggregate supply according to the two-sector model.
The document discusses Keynes' income determination model and the concepts of consumption, saving, investment, and equilibrium. It can be summarized as:
1) The model shows how consumption, saving, and investment determine aggregate demand and income in a simple two-sector closed economy.
2) Consumption depends on income and is modeled as C = Ca + cY, where Ca is autonomous consumption and cY is induced consumption. Saving is the portion of income not consumed.
3) Equilibrium occurs where aggregate expenditure (C + I) equals total income, as shown by the intersection of the AE and 45-degree lines. At this point, planned saving equals planned investment.
The document summarizes Keynesian income determination through the aggregate demand-aggregate supply model. It defines consumption and investment functions, which together determine aggregate demand. Consumption depends on income through the marginal propensity to consume. Investment is assumed constant in the short-run. Equilibrium income is reached at the point where aggregate demand equals aggregate supply. This can be modeled as either the AD-AS approach where equilibrium Y satisfies C+I=C+S, or the savings-investment approach where I=S. Numerical examples are provided to illustrate the equilibrium income calculation under each approach.
Determination of income and employment important notesVijay Kumar
This document defines key macroeconomic concepts related to aggregate demand and supply. It explains that:
1. Aggregate demand is the total planned expenditure on final goods and services and equals consumption + investment + government spending + net exports. Consumption and investment make up aggregate demand in a simple two-sector economy.
2. Aggregate supply is the total planned output of final goods and services and equals national income. National income equals consumption + savings at the national level.
3. The consumption function shows the relationship between consumption and national income, where consumption has an autonomous and induced component. The marginal propensity to consume is the change in consumption from a change in income.
1. The document discusses consumption, saving, and investment functions.
2. It explains that consumption is a linear function of disposable income, defined as C = C0 + cY, where C0 is autonomous consumption and c is the marginal propensity to consume (MPC).
3. A saving function can be derived from the consumption function as S = -C0 + (1-c)Y, where 1-c is the marginal propensity to save (MPS).
4. Investment is assumed to be autonomous (exogenous) and constant, defined as I = I0, where I0 is a given, positive level of investment.
This document discusses the concept of the multiplier effect in economics. It provides background on how the multiplier was originally developed by F.A. Kahn and later refined by Keynes. It then defines Kahn's employment multiplier and Keynes' investment/income multiplier. The document goes on to provide the formula for calculating the multiplier and discusses how it is affected by the marginal propensity to consume. It also provides an example of how the multiplier effect causes total income to increase through successive rounds of spending.
This document discusses key concepts related to consumption functions in economics. It defines consumption as aggregate expenditure on goods and services to satisfy wants. Consumption is determined by and a function of income (C=f(Y)). The simple consumption function is expressed as C=C0+C1Y, where C0 is autonomous consumption and C1 is the marginal propensity to consume. Autonomous consumption refers to minimum spending needed even without income. The document also discusses average and marginal propensity to consume, save, and invest, and how these relate to the multiplier concept in economics.
Introduction to consuption function,multiplier,accelratorDebasish Ghadei
This document provides an introduction to consumption functions, the multiplier effect, and the accelerator principle in economics. It defines key terms like the consumption schedule, average propensity to consume, marginal propensity to consume, and the investment multiplier. It presents examples to illustrate how increases in consumption or investment can lead to multiplied increases in total national income through repeated rounds of spending. The size of the multiplier depends on the marginal propensity to consume. The accelerator principle is also explained as how increased consumption demand can lead to increased investment in capital goods.
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This chapter discusses how to determine national income and its fluctuations. It introduces the concepts of aggregate expenditure (AE), equilibrium income, the consumption function, savings function, investment, and the multiplier. AE is the total planned spending in the economy. Equilibrium occurs when AE equals national income (Y). The chapter shows that an increase in investment (I) or autonomous consumption will increase AE and equilibrium Y through the multiplier effect. It also discusses the "paradox of thrift" where an increase in savings can reduce income.
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MACROECOMICS
1. 8.INCOME DETERMINATION AND MULTIPLIER
Introduction
• The present chapter deals with determination of
equilibrium level of income and output.
• We will compare the actual situation with
desired situation of equilibrium.
• It is desired that economy should be at full
employment level of output, but actually it can
be at under employment and over full
employment also.
2. DETERMINATION OF EQUILIBRIUM LEVEL OF INCOME/OUTPUT/
EMPLOYMENT
• According to Keynesian theory, equilibrium is determined in terms of aggregate demand
aggregate supply. Income/output/employment are in equilibrium at that level at which
AD = AS.
AD= AS ...(1)
AD=C+l ...(2)
AS=C+S ...(3)
Therefore, S=l (Because AD = AS at equilibrium) Here,
AD = Aggregate demand C = Consumption
I = Investment
AS = Aggregate supply S = Savings
3. Equilibrium level of income/output/employment implies that there is no surplus or
deficiency in the economy. What is produced (AS) is demanded (AD) by the
economy. Under AD and AS approach it is assumed that
• AD is planned level of demand by various sectors of the economy.
• AS is planned level of aggregate supply. AS is amount of goods and services which producers
are planning to sell.
• Equilibrium is achieved when planned expenditure (AD) is equal to planned level of supply of
goods and services (AS) or AD = AS or C+ I = C+ S or S = I.
Hence, there are two approaches to determine equilibrium level of income / output/
employment.
4. Determination of Equilibrium by AD and AS
Approach
According to Keynesian theory,
• The equilibrium level of income is determined where
planned level of aggregate demand (AD) is equal to
level of aggregate supply (AS).
Since AD is aggregate expenditure on consumption (by
households) and investment (by firms) therefore AD is
represented by C+I curve (also known as C+I approach).
5. Y C S I AD =C+I AS=C +S
0 50 -50 100 150 0
100 100 0 100 200 100
200 150 50 100 250 200
300 200 100 100 300 300
400 250 150 100 350 400
500 300 200 100 400 500
Assumptions : The following table is based on two assumptions :
Planned level of investment = Rs100 crore (autonomous investment)
C = 50+0.5Y ; here Cbar = 50 crore and MPC(b)=0.5
Equilibrium level of Income = S = I, or AD = AS
The above table shows that economy is at equilibrium at Rs300 crore of income, as at this level.
6. Aggregate demand = Aggregate supply = Rs300 crore (Planned)
• Before this income level (Rs300 crore) AD>AS (planned) so, an economy will
produce further till it reaches equilibrium.
• After this income level (Rs300 crore) AS>AD, hence an economy should reduce
production till it reaches equilibrium.
7. Observations:
1. AD is C+1 curve as demand is for
and investment in a two sector economy.
2. AS is total amount of goods and services or
national income. Since income is consumed
and saved that is why it is shown by 45° line.
3. The above table and diagram show that
equilibrium level of income and output is
crore because at this level AD(300) = AS(300)
4. Equilibrium is determined at point E, which
corresponds to full employment equilibrium.
Accordingly, OM is equilibrium level of
income/output/employment of resources.
8. Adjustment Mechanism
1.If AD > AS i.e., when economy is planning to produce at OM2. It refers to excess of AD in relation
to supply. It means that buyers (consumers and firms) are planning to buy more goods and
services than what producers are planning to produce {i.e., supply). In this situation, inventory level
(stock of goods) starts falling and comes below the desired level.
2..If AD< AS, i.e., when economy is planning to produce at OM2. It means that buyers (consumers
and firms) are consuming and spending less or they are planning to buy less than what sellers are
planning to sell. This will lead to accumulation of inventories (stock of goods) with producers.
9. Determination of Equilibrium Through S an d I Approach
• According to this approach, the equilibrium level of
income/output/employment is determined at a point where planned or ex-
ante savings (S) are equal to planned or ex-ante investment (I).
Since AD=C+I
and AS = C+S
Therefore, if AD = AS
C+I = C+S or S = I
10. Assumptions : The following table is based on two assumptions :
• Planned level of investment (autonomous) = Rs100 crore
• C = 50+0.5Y ; here Cbar = Rs50 crore and MPC(b)=0.5
Table shows that
• The equilibrium level of income is Rs300 crore as at this level S = I = Rs100
crore.
• Before this income level, S < I (planned) so an economy should produce further
till it reaches equilibrium.
• After this income level, S > I, hence economy should reduce production till it
reaches equilibrium.
Y C S I AD =C+I AS=C +S
0 50 -50 100 150 0
100 100 0 100 200 100
200 150 50 100 250 200
300 200 100 100 300 300
400 250 150 100 350 400
500 300 200 100 400 500
11. Observations
• Part (B) of the diagram has been
derived from Part (A) or savings and
investment curves have been derived
from AD and AS curves
AD = AS (at equilibrium) or C+I = C+S or
S = I
• The saving curve slopes upwards
implying positive relation between
saving and income.
• Investment curve is parallel to X-axis because investment is autonomous (which remains same at all
levels of income).
• Equilibrium level of income/output/employment (Rs300 crore) is determined at point E2, where,
Planned savings = Planned investment (Rs100 crore)
• This corresponds to OM level of income/output/employment at full employment level.
12. Adjustment Mechanism
• If I > S, i.e., when economy is planning to produce at OM1. It refers to excess
of AD in relation to aggregate supply. It means that buyers plan to consume
more and save less than what producers are planning to produce (i.e., supply).
In this situation inventory level (stock of goods) starts falling and comes below
the desired level. To bring back the inventories at the desired level producers
expand production. This raises the employment level and in turn income level.
The two levels keep rising till AD = AS or S = I (equilibrium).
• If S > I, i.e., when economy is planning to produce at OM2. It means that
buyers are consuming less and saving more or they are planning to buy less
(AD) than what sellers are planning to sell (AS). This well lead to accumulation
of inventories (stock of goods), producers will reduce production. This reduces
the level of employment and in turn income level. The two levels keep falling
till AD = AS or S = I (equilibrium).
13. MEANING OF INVESTMENT MULTIPLIER
• Investment multiplier is the ratio of change in income to the initial change in
investment expenditure.
• Multiplier gives relation between an initial increase in investment and the
corresponding increase in income.
• In other words, change in income is a multiplier of change in investment. It
explains the number of times income increases due to an increase in
investment.
• For example, if investment increases by 4 crore and due to which income
increases by 20 crore, multiplier would symbolically be:
K = Change in Y= 20 = 5 Change in I 4
14.
15.
16. Working of Multiplier
(A).Forward Working of Multiplier
• If with increase in investment, income increases multiple times, it is
known as forward working of multiplier.
• "It refers to the actual process whereby a multiple increase in income is
brought about by increased expenditure on consumption due to new
investment".
• Multiplier works on a simple theory that more the consumption
expenditure, more will be the income generation.
• The multiplier process works on the basis :
1. Investment generates income.
2. Additional income causes a change in consumption.
3. Change in consumption depends on MPC i.e., on marginal propensity to
consume.
4. Additional consumption expenditure generates additional income for producers
of goods and services.
5. This process keeps repeating till the total increase in income equals the product
of multiplier and change in investment
17. Illustration. Assuming that additional investment is Rs20 crore and MPC is 0.5.
The working is as follows :
• The multiplier process keeps repeating till the additional income generated is
Rs40 crore. In the given situation,
K = 1 = 1 = 2
1 – MPC 1 – 0.5
Change in Y = Change in I x 2 = 20 x 2 = 40
18. Diagrammatic presentation of multiplier
The concept of investment multiplier can be explained as under :
1. Economy is at equilibrium at point E.
2. It corresponds to OM level of income at equilibrium.
3. With additional investment, A 7, equilibrium shifts to £, on ADX.
4. E1 corresponds to OM, level of income at equilibrium.
5. Equilibrium income increases from OM-OM1
6. The additional income MM1 is greater than additional investment II1 or MM1> II1 It is due
to the multiplier effect.
19. (B).Backward Working of Multiplier
• If with fall in investment, there is multiple times decrease in income, it is called
backward working of multiplier.
• For example, if investment decreases by Rs100 crores and multiplier is 2 then income
will finally decrease by 100x2 =7200 crores
• In the diagram AD curve and AS curve intersect at point E, hence equilibrium level of
income is OM.
• If on account of decrease in investment by Rs100 crore, AD curve shifts downward to
ADlthen equilibrium level of income decreases to OM1 i.e.,
20. Characteristics of Multiplier
1.Multiplier works in both the forward and backward directions.
• Forward working of multiplier shows multiple increase in income in response to
given increase in investment.
• Backward working of multiplier shows multiple decrease in income in response to
given decrease in investment.
2.There is positive relation between MPC and multiplier.
• Higher the value of MPC, higher is the value of multiplier.
• Lower the value of MPC, lower is the value of multiplier.
3.There is inverse relationship between MPS and value of the multiplier.
• Higher the value of MPS, lower is the value of multiplier.
• Lower the value of MPS, higher is the value of multiplier.
21. 4.Aggregate demand causes the multiplier effect i.e., increase in
components of AD brings multiplier effect (Forward effect).
Components of AD
i. Increase in consumption exp.
ii. Increase in government exp.
iii. Increase in investment exp.
iv. Increase in exports.
CHAPTER OVER
22. 9.EXCESS DEMAND AND DEFICIENT DEMAND
EQUILIBRIUM LEVEL OF EMPLOYMENT
• According to the Keynesian theory, equilibrium level of
income/output/employment can be determined at the
full employment level, under-employment level or at
over full employment level.
Possibility of Employment
• Full Employment level
• Under-Employment level
• Over Full Employment level
23. Full Employment Equilibrium
• Full employment equilibrium refers to a situation when the aggregate demand is equal to the
aggregate supply at full employment level, i.e., all those who are willing and able to work at
the prevailing wage rate get employment
1. AD and AS curves intersect at point £, which is full employment equilibrium because
aggregate demand EM corresponds to full employment level of output OM.
2. At OM level of output, economy is at full employment equilibrium because all those who are
willing to work at the prevailing wage rate have got employment.
3. Here, actual level of aggregate demand (EM) is equal to required level of aggregate demand
(EM) to maintain full employment
EM = EM Hence Full Employment
24. Over Full Employment Equilibrium
• Over employment equilibrium refers to a situation when the aggregate demand is
equal to the aggregate supply beyond the full employment level
Observations
1. Planned level of equilibrium is at point E,
where planned AD is equal to planned AS.
2. Accordingly, OM is full employment level of
output.
3. Actual level of AD (AD1) is higher than the
required level of AD (AD0).
4. Actual equilibrium is determined at point E1
which corresponds to over full employment of
resources (OM1).
5. Actual AD = FM required AD = EM Hence, there is excess demand = FM- EM = EF
6. Accordingly, OM1 is more than OM which implies over employment of resources by MM1
25. Under Employment Equilibrium
• Under Employment Equilibrium refers to a situation when the aggregate demand is
equal to the aggregate supply corresponding to under-employment of resources. It
occurs prior to the full employment level.
Observations
1. Planned level of equilibrium is at point E, where planned
AD is equal to planned AS.
2. Accordingly, OM is full employment level of output.
3. Actual level of AD (AD1) is lesser than the required level
of AD (AD0).
4. Actual equilibrium is determined at point E-, which
corresponds tounder employment of resources (OM2).
5. Actual AD= FM required AD= EM Hence there is
deficient demand = EM-FM= EF.
6. Accordingly, OM2 is less than OM which implies under-
employment of resources by MM2.
26. SCHOOLS OF THOUGHT : CLASSICAL AND KEYNESIAN
Classical Theory
The classical economists believed that full employment is a normal feature of a
capitalist economy.
The economy is always at full employment equilibrium because of two assumptions :
1. Supply creates its own demand
2. Wage rate and price of the commodity are flexible.
Keynesian Theory
Keynesian theory believes that full employment is an ideal situation, but economy can
be in equilibrium even at less than full employment level.
The economy may not always be at full employment equilibrium because of two
assumptions:
1. Demand creates its own supply
2. wage rate and price of the commodity are fixed.
27.
28. MEANING OF EXCESS DEMAND/INFLATIONARY GAP
• Excess demand refers to the situation when aggregate demand is in excess of
aggregate supply corresponding to full employment in the economy i.e., AD > AS.
(Or)
• When actual level of aggregate demand is more than required/planned level of
aggregate demand to maintain full employment.
• Inflationary gap refers to the situation of excess demand. It is equal to the difference
between AD beyond full employment and AD at full employment equilibrium.
29. Observations:
1. In the diagram at point E, AD = AS and there is full
employment in the economy.
2. If aggregate demand rises to ADV then there is excess
demand in the economy as AD AS.
3. In AD0 is the aggregate demand at full employment
level (required).
4. AD1 is the aggregate demand at beyond full
employment level (actual), when equilibrium is at 'E1'
and MM, is over full employment of resources.
5. Point E is a point of equilibrium corresponding to full
employment of resources. Point E1 is also a point of
equilibrium but, corresponding to over full
employment of resources.
6. The difference between AD1 and AD0 is the
inflationary gap i.e., Inflationary gap = Excess
demand.(measured at full employment output)=
Actual AD - Required AD = EM- EM = EE
30. Causes of Excess Demand
Cause of excess demand is, increase in money supply in the economy which is
due to
• Increase in consumption expenditure.
• Increase in exports.
• Increase in investment expenditure.
• Increase in Govt, expenditure.
Impact of Excess Demand
Impact of excess demand is as follows :
1. Impact on employment. As there is full utilisation of the resources available in
the economy, thus there is full employment. Hence, excess demand does not
lead to any increase in the level of employment.
2. Impact on output. Since the resources have already been utilised to the full,
thus excess demand does not lead to any increase in the output.
3. Impact on prices. As output and employment can-not change, so ultimate
pressure is on price. Prices tend to rise as competition among buyers will push
the price up.
31. MEANING OF DEFICIENT DEMAND/DEFLATIONARY GAP
• Deficient demand refers to the situation when aggregate demand is short of
aggregate supply corresponding to full employment in the economy i.e., AD < AS.
(Or)
• When actual AD is less than required / planned AD to maintain full employment.
• Deflationary gap refers to the situation of deficient demand. It is the shortfall in
aggregate demand from the level required to maintain full employment equilibrium
in the economy.
32. Observations
1. In the diagram, the desired level of demand at full
employment level is indicated by AD0.
2. AD2 indicates deficient demand level in the economy
when equilibrium is at point E2 and MM2 is under
employment of resources.
3. In the diagram, AD0 is the desired aggregate
demand corresponding to full employment.
4. AD2 is the actual aggregate demand corresponding
to under employment.
5.
6. Point E is a point of equilibrium corresponding to full
employment of resources. Point E2, is also a point of
equilibrium but, corresponding to under
employment of resources.
7. The difference between AD0 and- AD2 is the
deflationary gap i.e.,
Deflationary gap = Deficient demand (measured at full employment output)
= Required AD - Actual AD = EM-FM = EF
33. Causes of Deficient Demand
Cause of deficient demand is, decrease in money supply in the economy which
is due to
• Decrease in consumption expenditure.
• Decrease in exports.
• Decrease in investment expenditure.
• Decrease in government expenditure.
Impact of Deficient Demand
1. Impact on employment. As the level of investment falls in an economy, the level
of employment also decreases thereby causing unemployment in the economy.
2. Impact on output. Due to fall in investment and employment in the economy,
the output also tends to fall.
3. Impact on prices. As there is excess supply in the economy, thus the prices tend
to decrease leading to deflation which causes deflationary gap.
35. MEANING AND PHASES OF TRADE CYCLES
• Aggregate demand should be equal to aggregate supply.
• However, in reality, aggregate demand keeps changing, causing trade cycles. Trade
cycles or business cycles refer to the fluctuations in business activity.
• Thus, trade cycles refer to the ups and downs of business activity.
• In the curve moves in a cyclical manner showing the trade cycle which has jour phases
:
1. Boom
2. Recession
3. Depression
4. Recovery
36. 1. Boom. It is a situation when aggregate demand is maximum because of increasing
economic activity i.e., investment, employment, income and output. It causes
inflation.
2. Recession. Because of inflation, aggregate demand starts falling which reduces
investment, employment, income and output.
3. Depression. It is a stage where economic activities like income, production,
employment, output and prices fall. Profitability is low and aggregate demand is at
its lowest.
4. Recovery. In depression, the government and monetary authorities start investing
more and help economy recover from depression by raising income, employment
and thus aggregate demand.
37. POLICY MEASURES TO CONTROL EXCESS DEMAND AND DEFICIENT DEMAND
There are two policy measures to solve the problem of excess demand and
deficient demand.
1. Fiscal Policy measures.
2. Monetary Policy measurers.
Fiscal Policy (Fiscal Measures)
Fiscal policy refers to revenue and expenditure policy of the government. It is
also called Budgetary Policy of the government. It focuses on stability of the
economy by correcting the situations of excess demand (inflationary gap) and
deficient demand (deflationary gap).
38. 1.Government Expenditure
• It is the principal component (or principal instrument) of fiscal policy. The government
of a country incurs various types of expenditure, mainly:
1. Expenditure on public works programmes such as the construction of roads, dams,
bridges, etc.
2. Expenditure on education and public welfare programmes.
3. Expenditure on the defence of the country and the maintenance of law & order.
4. Expenditure on various types of subsidies to the producers with a view to encourage
production.
2.Taxes
• Taxes are a compulsory payment made to government by the Household. By
increasing the tax burden on the households, the government 'educes their
disposable income. Accordingly, AD is reduced or excess demand is managed.
• On the other hand, by lowering the tax burden, die government
• increases disposable income of the households. Accordingly, AD is raised and deficient
demand is managed.
39. 3) Public Borrowing/Public Debt
• By borrowing from the public, the government creates
public debt. In a situation of deficient demand (or
when AD needs to be increased), ne government
reduces its borrowing from the public. So that ceople
are left with greater liquidity (or cash balances) and
aggregate expenditure remains high.
4.Borrowing from RBI (the Cental Bank)
• Borrowing by the government from the RBI is another
element of fiscal policy. It is increased to fight
deflationary gap, and reduced to fight inflationary
gap. Higher borrowing releases greater liquidity in the
economy, as required to correct deflationary gap
(deficient demand).
40. Monetary Policy: Meaning and Its Instruments to Impact Availability of Credit
Monetary policy refers to the policy of the central bank of a country to control money
supply and credit in the economy.
Instruments of Monetary Policy
The measures of monetary policy are
1. Quantitative measures
2. Qualitative measures
41. 1.Quantitative Measures
These measures influence the total amount of money supply in circulation. These
are :
I.Bank rate. It is the minimum rate at which the Central Bank of a country gives credit to
the commercial banks against approved securities. To control:
1. Inflation/Excess demand. Bank rate is increased,
which further increases the rate of interest (i.e., the
lending rates of commercial banks). It makes the
credit costlier, demand for credit reduces, less money
goes to the economy, purchasing power is curtailed,
AD falls and excess dd is corrected.
2. Deflation/Deficient demand. Bank rate is reduced, it
decreases the rate of interest, makes the credit
cheaper, dd for credit increases, more money flows to
the system, purchasing power increases, AD rises and
def. dd is corrected.
42. 2.Repo rate ;-
The rate at which RBI offers short term loans to the commercial banks by buying
the government securities in the open market is called repo rate .
• Inflation/Excess demand. Repo rate is increased, which further increases the cost of capital .
It makes the credit costlier, demand for credit reduces, less money goes to the economy,
purchasing power is curtailed, AD falls and excess demand is corrected.
• Deflation/Deficient demand.Repo rate is reduced,
which further decrease the cost of capital, makes
the credit cheaper, dd for credit increases, more
money flows to the system, purchasing power
increases, AD rises and def. dd is corrected.
43. • Inflation/Excess demand :- Reverse Repo rate is
increased ,More funds are parked with RBI
,decreased money supply from an economy AD
falls and excess demand is corrected.
• Deflation/Deficient demand:- Reverse Repo rate is
decreased ,less funds are parked with RBI
,Increased money supply from an economy AD
rises and defient demand is corrected
3.Reverse Repo rate :-
The rate at which the RBI accept deposit from the commercial banks is
called Reverse Repo Rate . It is also called Reverse repurchase rate.
44. 4.Open market operations.
It refers to purchase and sale of government securities in the open market (public and
commercial banks) by the Central Bank.
To control:
1. Excess demand. Government securities are sold by the
Central Bank in the open market. The Central Bank
withdraws additional purchasing power. There will be
contraction of credit, less money will flow in the system.
Purchasing power in the economy reduces. Aggregate
demand falls and excess demand stands corrected.
2. Deficient demand. By purchasing the government
securities, the Central Bank injects additional
purchasing power in the system which expands credit.
More money supply will flow in the system, purchasing
power in the economy increases. Aggregate demand
rises and deficient demand is corrected.
45. 1.CRR (cash reserve ratio or minimum reserve ratio).
It is the minimum percentage of deposits of commercial banks (net demand and
time liabilities) which is kept with RBI.
• Excess demand. CRR is increased to control excess demand. The Central Bank withdraws
additional purchasing power. There will be contraction of credit, less money will flow in the
system, purchasing power in the economy reduces. Aggregate demand falls and excess
demand stands corrected.
• Deficient demand. CRR is decreased to control deficient demand. The Central Bank injects
additional purchasing power in the system which expands credit. More money supply will
flow in the system, purchasing power in the economy increases.
46. 1.Excess demand.
• SLR is increased to control excess demand. The
Central Bank withdraws additional purchasing power.
• There will be contraction of credit, less money will
flow in the system, purchasing power in the
economy reduces.
• Aggregate demand falls and excess demand stands
corrected.
2.Deficient demand.
• SLR is decreased to control deficient demand.
• The Central Bank injects additional purchasing power
in the system which expands credit.
• More money supply will flow in the system,
purchasing power in the economy increases.
2.SLR (Statutory Liquidity Ratio).
It is the percentage of deposits of commercial banks which every
bank is required to maintain with itself in the form of designated liquid
assets. Liquid assets may be :
1. Excess cash reserves.
2. Unencumbered government and other approved securities.
3. Current account balances with other banks.
47. II.Qualitative Measures
• These measures affect allocation of credit between alternative uses.
1. Imposing margin requirement. A margin is the difference between market
value of the security offered by the borrower against the loan and the amount of
the loan granted e.g., if margin requirement is 20% then the bank is allowed to
give loan only upto 80% of the value of securities.
To control :
a) Excess demand. Margin requirement is increased to correct excess demand. The Central
Bank withdraws additional purchasing power. There will be contraction of credit, less
money will flow in the system, purchasing power in the economy reduces. Aggregate
demand falls and excess demand stands corrected.
a) Deficient demand. Margin requirement is reduced to correct deficient demand. The
Central Bank injects additional purchasing power in the system which expands credit.
More money supply will flow in the system, purchasing power in the economy
increases. Aggregate demand rises and deficient demand is corrected.
48. 2. Moral suasion and direct action.
It is a combination of persuasion and pressure that the Central Bank applies to other banks in
order to get them fall in line with its policy. It is done through letters, speeches and hints to
the banks. Central Bank may take direct action against member banks which do not comply
with its policies of credit expansion or contraction.
3. Selective credit control. This can be applied in both a positive as well as a negative
manner.
• In a positive manner, the credit will be channelized to particular priority sectors.
• In a negative manner, the flow of credit will be restricted to particular sectors.
CHAPTER OVER
50. BUDGET: MEANING
"Budget is a statement of the estimates of the government receipts and
government expenditure during the period of the financial (fiscal) year which
runs from April 1 to March 31"
Features
It is an estimate and not an actual
statement.
It is prepared annually.
It is a constitutional requirement to
present budget before parliament.
Revenue and expenditure are planned
according to government budget.
Budget impacts the economy
through aggregate fiscal discipline
and resource allocation.
51. OBJECTIVES OF A BUDGET
1. Reducing inequalities in Income and Wealth. The government uses fiscal instruments of
taxation and subsidies to improve the distribution of income and wealth in the economy.
2. Allocation of Resources. Private enterprises will always desire to allocate resources to those
area of production where profits are maximum .
3. Economic Stability. Using its revenue and expenditure policy, the government ensures
economic stability in the economy. Free interaction of market forces i.e., the forces of supply
and demand are bound to generate trade cycles, also called business cycles
4. Direct Participation and Economic Growth by Managing Public Sector Enterprises. The
government seeks to accelerate the pace of growth by establishing public sector enterprises.
5. Employment opportunities:-Bugetary policy focuses on the generation of employment
opportunities through investment in public enterprises. Budgetary provisions are made for
schemes like MGNGEGA offering employment to poorer section of the society.
52.
53. There are two components of budget:
• Budget receipts. It has two parts :
1. Revenue receipts.
2. Capital receipts.
• Budget expenditure :
i. Revenue expenditure and capital expenditure.
Or
ii. Development expenditure and non-development expenditure.
Or
iii. Plan expenditure and non-plan expenditure.
54. MEANING OF BUDGET RECEIPTS
Budget receipts refer to estimated money receipts of the government from all
sources during the fiscal year.
It consists of:
• Revenue receipts.
• Capital receipts.
Revenue Receipts
Revenue receipts are those estimated receipts of the government during the fiscal
year which do not affect asset or liability status of the government.
These receipts :
• Do not create a corresponding liability for the government e.g., tax receipts.
• Do not lead to reduction in assets of the government e.g., fees, fines, grants etc. It
consists of :
55. • Tax revenue receipts. Receipts from all types of direct and indirect taxes, e.g.,
income tax, corporation tax, sales tax, excise duty etc.
• Non-tax revenue receipts. These are received from sources other than taxes, e.g.,
fees, fines, grants etc.
56. A Tax Receipts
• A tax is a compulsory payment made by an individual, household or a firm to the
government without anything corresponding in return.
Its main features are:
• It is a compulsory payment i.e., if tax is imposed by government on a person, he
has to pay it. It is compulsory payment.
• The revenue received through taxes is spent for public welfare.
• There is no proportionate relation between the tax and the social benefits offered
correspondingly.
• Payment of taxes is the personal responsibility of the person.
• Taxes are imposed legally i.e., according to the law of land.
57. • Progressive Tax: Progressive tax implies that the rate of tax increases with an
increase in income i.e., a tax which causes greater real burden on the rich
compared to the poor, e.g., income tax in India is progressive in nature.
• Regressive Tax: Regressive tax implies that the rate of tax decreases with the
increase in income i.e., tax which causes greater real burden on the poor compared
to the rich. It implies that incidence (effect) of tax decreases with increase in income,
e.g., if rate of tax is 10% for all, then a person who earns Rs 5000 per month will
have more burden than who earns Rs50,000 per month
• Value added Tax: It is an indirect tax which is imposed on "value added" at the
various stages of production. It is a tax cn value of output minus intermediate
consumption. It is imposed on each stage of production.
58. • Specific Tax: When a tax is levied on a commodity on the basis of its units, size or
weight, it is called the specific tax.
• Direct Taxes: Direct taxes are those taxes whose final burden falls on that person
who makes the payment to the government. Here, the incidence and impact of the
tax lie on the same person, e.g., income tax, wealth tax etc.
• Indirect Taxes: Indirect taxes are those taxes which are paid to the government by
one person but their burden is borne by another person. Here, the incidence and
impact of tax lie on different persons, e.g., sales tax, excise tax etc.
59. Basis Direct Tax Indirect Tax
Meaning
Direct taxes are those taxes whose final
burden falls on that person who makes the
payment to the
government.
Indirect taxes are those taxes which are
paid to the government by one person
but their burden is borne by
another person.
Incidence and
Impact of tax
When the incidence and impact of the tax
lie on the same person, it is called direct tax.
When the incidence and impact of tax lie
on different persons then it is called
indirect tax.
Shift of
taxation
The impact of direct taxation cannot be
shifted.
The impact of indirect taxation can be
shifted to others.
Nature
Direct taxes are generally progressive in
nature.
Indirect taxes are generally regressive in
nature.
Effect on market
price
These taxes do not affect the market price
of the product.
Indirect taxes have a direct and positive
effect on the market price of a product.
Examples
Income tax, wealth tax, corporation tax
etc.
Sales tax, excise duty, VAT etc.
60. Capital Receipts
• Capital receipts are those estimated receipts of the government during the fiscal
year which affect asset or liability status of the government.
These receipts:
• Create a corresponding liability for the government e.g., borrowings,lead to
reduction in assets of government e.g., disinvestment, recovery of loans.
Thus, it consists of:
• Borrowings from within the country and abroad.
• Other receipts like proceeds from disinvestment i.e., when the government sells off
its shares of public sector enterprises to private sector.
• Recovery of loans from state government and other debtors
61. Classification of Capital Receipts
1. Borrowing and other Liability
2. Recovery of loans
3. Other receipts (Disinvestment)
1.Borrowings and Other Liabilities. Borrowing creates liability for the
government. Accordingly, borrowings are to be treated as capital receipts. It is
a debt creating capital receipt. The government borrows money from :
• The general public (market borrowings).
• The Reserve Bank of India.
• The rest of the world.
62. 2.Recovery of Loans.
• The debtors are assets for the government. Recovery of loans causes a reduction
in assets (debtors) of the government.
• Hence, recovery of loans is a capital receipt. It is a non-debt creating capital receipt.
3.Other Receipts.
• It includes proceeds from 'disinvestment'. It is the opposite of investment.
Disinvestment occurs when the government sells off its shares of public sector
enterprises to private sector. It is called privatisation.
• It is treated as capital receipt because it causes reduction in assets of the
government. It is a non-debt creating capital receipt
63. Basis Revenue Receipt Capital Receipt
Creation of liability
These receipts do not create any
corresponding liability for the
government, e.g., Tax receipt, licence
fees.
These receipts create corresponding
liability for the government, e.g.,
Borrowings.
Reduction in
assets
These do not cause any reduction in
assets of the government, e.g., Licence
fees, gifts and grants, fines and
penalties etc.
These cause reduction in assets of the
government, e.g., Recovery of loans,
disinvestment.
Effect on assets
and liabilities of
government
Assets and liabilities of the government
are not affected.
Assets and liabilities of the
government are affected.
64. Categorise: Government Receipts into Revenue Receipts and Capital Receipts
• Borrowings from ROW. It is a capital receipt as it creates liability for the government.
• Receipts from sale of shares of public sector undertakings. It is a capital receipt as
it leads to reduction in assets of the government.
• Profits of public sector undertakings. It is a revenue receipt as it neither creates a liability
nor reduces any assets of the government.
• Recovery of loans. It is a capital receipt as it leads to reduction in assets of the
government.
• Corporate tax. It is a revenue receipt as it neither creates a liability nor reduces assets of
the government.
• Sale of public undertakings. It is a capital receipt as it leads to reduction in assets of the
government.
• Dividends on investment made by the government. It is a revenue receipt as it
neither creates a liability nor reduces any assets of the government.
65. MEANING OF BUDGETARY EXPENDITURE
• It refers to the estimated expenditure of the government, on its 'development and
non- development programmes' or on its plan and non-plan programmes during
the fiscal year. It may be classified in three ways :
• Revenue expenditure and capital expenditure.
• Development expenditure and non-development expenditure.
• Plan expenditure and non-plan expenditure.
66. Revenue Expenditure and Capital Expenditure Revenue Expenditure
1.Revenue expenditure
• It refers to the estimated expenditure of the government in a fiscal year which does
not affect assets and liabilities status of the government.
• This expenditure :
• Does not create assets of the government.
• Does not cause a reduction in liabilities of the government.
• For example, old age pensions, salaries and scholarship, expenditure on
administration, defence etc.
67. 2.Capital Expenditure
• Capital expenditure refers to the estimated expenditure of the government
in a fiscal year which affects assets and liabilities status of the government.
This expenditure :
• Creates assets of the government,
• Causes a reduction in liabilities of the government.
• For example, purchase of shares of MNCs', construction of dams and steel
plants, repayment of loans etc.
68. Basis Revenue Expenditure Capital Expenditure
Creation of assets
These expenditures do not create
assets for the government, e.g.,
expenditure on old age
pension,unemployment
allowance.
These create assets for the
government, e.g., expenditure on
construction of building, on
purchase
of shares etc.
Reduction in liabilities
These do not cause any reduction in
liability of the government, e.g.,
expenditure on salaries,
scholarship, subsidy etc.
These cause reduction in liability of
the government, e.g., repayment of
loans.
Effect on assets and
liabilities of
government
Assets and liabilities of the
government are not affected.
Assets and liabilities of the
government are affected.
69. Categorise: Government Expenditure into Revenue Expenditure and Capital
Expenditure
• Repayment of loans. It is a capital expenditure as it leads to reduction in liability of the
government.
• Grants given to the state government. It is revenue expenditure because it neither
creates an asset nor causes a reduction in liabilities of the government.
• Subsidies. It is a revenue expenditure as it neither creates an asset nor reduces the
liability of the government.
• Construction of hospitals. It is a capital expenditure as it leads to creation of assets of
the government.
• Payment of interest. It is a recurring expenditure, thus it is treated as revenue
expenditure as it neither creates assets nor causes a reduction in liabilities of the
government.
70. Development Expenditure and Non-Development Expenditure
Development Expenditure
• Development expenditure is incurred on economic and social development of the
country.
• It relates to growth and development projects of the country.
• For example, expenditure on development of agriculture, industries, transport
and communication, health, education etc.
• Non-Development Expenditure
• Non-development expenditure is the expenditure on general services of the
government which do not usually promote economic development.
• It relates to non-developmental activities of the government.
• For example, expenditure on administration, defence, justice, grants to state
government etc.
71. Development Expenditure Non-development Expenditu
Development expenditure directly contributes to flow
of goods and services.
Non-development expenditure
contributes to flow of goods and services.
Development expenditure is productive in nature as
it adds to the flow of goods and services.
Non-development expenditure is not pr
nature as it does not add to flow of
services directly.
Examples : Expenditure on development of
agricultural sector, industries, transport etc.
Examples : Expenditure on administration,
justice etc.
72. Plan Expenditure and Non-plan Expenditure
Plan Expenditure
• Plan expenditure is the expenditure to be incurred during the year in
accordance with the central plan of the country.
• It is incurred on financing the objectives of central plans of different sectors of
the economy.
• For example, planned expenditure on health, education, law and order etc.
Non-Plan Expenditure
• Non-plan expenditure refers to all such government expenditures which are
non- planned.
• It is incurred on financing those projects which are not planned in the central
plan.
• For example, expenditure as a relief to the earthquake victims, expenditures on
construction of houses demolished due to floods etc.
73. Plan Expenditure Non-plan Expenditure
It is within the scope of government plans. It is out of scope of government plans.
It shows expenditure to be incurred on projects
covered under the central plans.
It shows expenditure to be incurred on projects
not covered under the central plans.
Examples : Expenditure on electricity
generation, rural development, roads, bridges
etc.
Examples : Expenditure on relief to the
earthquake victims, construction of houses
demolished due to floods etc.
74. BUDGET DEFICIT AND ITS TYPES
• Budgetary deficit is defined as the excess of total estimated expenditure
over total estimated revenue. When the government expenditure exceeds its
revenue it incurs a budgetary deficit.Budgetary deficit can be of three types :
• Revenue deficit = Total revenue expenditure - Total revenue receipts
• Fiscal deficit = Total expenditure - Total receipts (excluding borrowings)
• Primary deficit = Fiscal deficit - Interest payments
75. 1.Revenue Deficit
• Revenue deficit is the excess of revenue expenditure over revenue receipts.
• Revenue Deficit = Revenue expenditure - Revenue receipts RD = RE - RR, when RE >
RR
Implications
1. Because of revenue deficit, the government may have to cut its expenditure on
several welfare programmes in the country. This leads to loss of social welfare.
2. The government may have to raise funds through borrowing. This raises liabilities of
the government and lowers its credit-worthiness.
3. The government may be compelled for disinvestment—selling its ownership of
public enterprises. The ownership of public enterprises may be lost to foreign
companies. Consequently, economic control of the foreigners may increase in the
domestic economy.
76. 2.Fiscal Deficit
Fiscal deficit is the excess of total expenditure over total receipts (other than
borrowings).Fiscal Deficit = Total expenditure (Revenue expenditure + Capital
expenditure) - Total receipts other than borrowings (Revenue receipts + Capital
receipts other than borrowings)
• FD = BE - BR other than borrowings, when BE > BR other than borrowings
Here, FD = Fiscal deficit; BE = Budget expenditure; BR= Budget receipts.) In fact,
fiscal deficit is the estimation of total borrowings by the government. It is often called
'Gross Fiscal Deficit'.
• Gross Fiscal Deficit = (i) Borrowing from RBI + (ii) Borrowing from abroad + (iii) Net
borrowing at home
77. Implications
• Fiscal deficit is an estimate of borrowings by the government. Greater fiscal deficit
implies greater borrowings by the government. It has following implications:
1. Inflationary Spiral: Borrowing from RBI is often linked to inflationary spiral in the
economy. This is how it happens: Borrowing from RBI increases money supply
in the economy.Increase in money supply leads to increase in the general price
level. A persistent increase in the general price level (over a period of time)
leads to inflationary spiral
2. National Debt: Fiscal deficit leads to national debt. It hinders growth. Because, a
significant percentage of national * :cme is used up to pay the past debts.
3. Vicious Circle of High Fiscal Deficit and Low GDP Growth:Constantly high
fiscal deficit leads to a situation where: (a) GDP growth remains low because of
high fiscal deficit, and (b) fiscal deficit remains high because of low GDP
growth.[High fiscal deficit —> Low GDP growth -* High fiscal deficit.]
78. 4. Crowding-out: High fiscal deficit leads to 'Crowding-out Effect'. This is a situation
when high borrowings by the government (owing to high fiscal deficit) reduces
the availability of funds (in the money market) for the private investors.
Accordingly, overall investment in the economy is reduced.
5. Erosion of Government Credibility: High fiscal deficit (and consequently,
the mounting national debt) erodes credibility of the government in the
domestic as well as international money market. 'Credit rating' of the
government (and the economy) is lowered. Owing to lower credit rating,
global investors start withdrawing their investment from the domestic
economy.
79. Primary Deficit
• Primary deficit is the difference between fiscal deficit and interest payment.
• Primary Deficit = Fiscal deficit - Interest payment PD= FD - IP
• (Here, PD = Primary deficit; FD = Fiscal deficit; IP = Interest payment.) While fiscal
deficit shows borrowing requirement of the government inclusive of interest
payment on the past loans, primary deficit shows borrowing requirement of the
government exclusive of interest payment, in other words, primary deficit indicates
government borrowings on account of current year expenditures and current year
receipts of the government.
Implications
• Implications of primary deficit are similar to those of fiscal deficit. The only
difference is that primary deficit does not carry the load of interest payments, on
account of the past loans. Primary deficit just indicates borrowings when: Current
year expenditure > Current year revenue.
80. Fiscal Deficit Primary Deficit
It shows the total borrowing requirements of the
government, including interest payments.
It shows the total borrowing requirements of the
government, excluding interest payments.
It is the difference between total expenditure and total
receipts excluding borrowings.
It is the difference between fiscal deficit and interest
payments.
Fiscal deficit = Total estimated expenditure (-) Total
estimated receipts excluding borrowings.
Primary deficit = Fiscal deficit (-) Interest
payments.
81. TYPES OF BUDGET
Balanced Budget
• A balanced budget is that budget in which government receipts are equal to
government expenditure.
• Balanced budget Estimated government receipts = Estimated government
expenditure
Merits of Balanced Budget
• The government does not indulge in wasteful expenditure.
• A balanced budget implies financial stability of the economy. Demerits of Balanced
Budget
• It is not useful to solve the problem of unemployment during depression.
• Process of economic growth is very slow as less efforts are done to grow the
economy.
82. Unbalanced Budget
• An unbalanced budget is that budget in which receipts and expenditure of the government
are not equal. It may be
1. Surplus budget
2. Deficit budget
Surplus Budget
• It is that budget in which government receipts are greater than government expenditure.
• Surplus budget = Estimated government receipts >Estimated government expenditure
Merits of Surplus Budget
• It solves the problem of inflation or excess demand by lowering the level of AD in the
economy due to
• Huge revenue collection by the government which reduces purchasing power of the people.
• Reduced government expenditure which reduces supply of money to correct inflation.
83. Demerits of Surplus Budget
• During depression, a surplus budget may lower the level of AD to such an extent that
causes low level of output, low level of employment and low level of income in the
economy as government spends less and generates more revenue.
84. Deficit Budget
• It is that budget in which government receipts are less than government
expenditure. Deficit Budget = Estimated government receipts < Estimated
government expenditure
Merits of Deficit Budget
• It solves the problem of deflation or deficient demand. During depression, a
deficit budget raises the level of AD by : .
• Low level of revenue collection which leaves public with more purchasing power.
Demerits of Deficit Budget
• During excess demand, a deficit budget would further increase the difference
between AD and AS which would lead to inflationary gap as here government
spends more and generates less revenue.