A note on ........INCOME
DETERMINATION
1. What
is MPC (marginal propensity to consume) ? How is it related to MPS(marginal propensity to save)?
MPC refers to ratio of change in
consumption to change in income.
MPC=ΔC/ΔY
Relationship between MPC
& MPS
1.MPC + MPS = 1
2.MPC = 1 – MPS
3.MPS = 1 – MPC
2. Difference between Ex-ante & Ex-post investment
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Ex-ante investment
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Ex-post investment
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planned
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Actual
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Hypothetical or assumed
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real
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Planned on the basis of future expectations
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Result of various economic activities
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3. what is effective demand ? How will you determine the
autonomous expenditure multiplier when price of goods and rate of interest are
given ?
If the elasticity of supply is
infinite, then the output will be solely determined by aggregate demand at this
price in the economy. This is called Effective Demand.
The
equilibrium level of output and aggregate demand is derived by solving the
equation,
Y =
AD, Y = A + cY A is
autonomous expenditure
Y – cY = A, Y( 1 – c ) = A c is MPC
Y = A / 1 – c
The value of Y depends on
the parameters A and C.
4.
Match the column B and C with A
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A
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B
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C
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APC
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ΔC / ΔY
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1-APC
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APS
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C / Y
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1-MPC
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MPC
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S /Y
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1-APS
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MPS
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ΔS / ΔY
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1-MPS
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- Paradox of Thrift
If all the
people of the economy increase the proportion of income they save ( i.e, if the
MPS of the economy increases) the total value of savings in the economy will not
increase – it will either decline or remain unchanged. This result is known as
Paradox of Thrift. (draw diagram)
* AGGREGATE DEMAND (AD)
The total
demand of goods and services in the economy at a particular price level id AD.
AD consists of Consumption, Investment and Government
spending. i.e.,
AD = C+I+G C=Ĉ+cY I = Ī Ā=Ĉ+Ī
Or
AD = Ā + cY
* AGGREGATE SUPPLY
AS is the
total supply of goods and services in the economy at a particular price level.
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