Determination Of Income And Employment Class 12 Notes Macro Economics Chapter 4 - CBSE

Chapter: 4

What Are Determination Of Income And Employment ?

https://drive.google.com/file/d/1HMbXuYorR82rQCl3506lBzUzpwkGLQ3W/view

Aggregate Demand

It refers to the demand for all the goods and services which are to be produced in an economy during a particular period.

Aggregate demand in two sector closed economy consists of consumption demand or the demand for consumer goods and the investment demand or the demand for investment goods.

Aggregate demand in three sector closed economy consists of consumption demand, investment demand and the government expenditure.

Aggregate demand in four sector open economy consists of consumption demand, investment demand, government expenditure and the net exports
(total exports- total imports).

Aggregate Supply

It refers to the output that is planned by the producers in a particular period of time.

Consumption Demand

An economy is dependent upon the propensity to consume and the level of disposable income.

Propensity To Consume

It is also known as the consumption function which shows the functional relationship between the level of onsumption and the level of income.

Measures

Average propensity to consume

It refers to the ratio of the consumption expenditure and a particular level of income.

Marginal propensity to consume

It is the ratio between the change in consumption expenditure and the change in level of income.

Propensity To Save

It is also known as the saving function which shows the functional relationship between the level of saving and the level of income.

Measures

Average propensity to save

It refers to the ratio of the savings and a particular level of income.

Marginal propensity to save

It is the ratio between the change in savings and the change in level of income.

Short Run/short Run Equilibrium Output

Keynes has defined short run as the time period in which the output in the economy can be increased by employing more labour with the given productive capacity of the economy.

Short run equilibrium output is the level of income or output at which aggregate demand is equal to aggregate supply in economy. Alternatively, short run equilibrium output can also be attained at the level of income or output where savings are equal to investment.

Investment Multiplier Or Output Multiplier

It refers to the number of times by which the income may increase resulting from an initial investment.

It can be referred to as the ratio of the change in income to the change in investment.

Multiplier can work in the forward direction as well as backward direction. Multiplier works in forward direction when there is multiple rise in income caused by the increase in investment. On the other hand multiplier works in backward direction when the multiple decrease in income is caused by the decrease in investment.

Full Employment

It is a situation in which all the people who are willing and able to work at the prevailing wage rate have got work to do.

Voluntary Unemployment

It refers to a situation when persons who are able to work but are not willing to work although suitable work is available for them.

Involuntary Unemployment

It is a situation that occurs when some people are willing and able to work at the prevailing wage rate do not get any job or work to do.

Equilibrium In The Economy

Full Employment Equilibrium

It refers to the equilibrium where all resources in the economy are fully utilised (employed).

Under Unemployment Equilibrium

It is a state of equilbrium where level of demand is less than ‘full employment level of output’.

Deficient Demand

When in an economy aggregate demand falls short of ‘aggregate supply at full employment’ the demand is said to be a deficient demand.

Excess Demand

It refers to the excess of aggregate demand over the aggregate supply at the level of full employment. Excess demand results in to the inflationary gap which refers to the access of actual aggregate demand over the aggregate demand which is required to maintain full employment in the economy.

Causes Of Aggregate Demand

Rise in consumption expenditure
Investment Expenditure
Government Expenditure
Rise in exports and fall in imports etc.

Measures To Control Excess/Deficient Demand

Fiscal measures

It work through the adjustment in the government expenditure, taxes and government borrowings.

Revenue Policy
Expenditure Policy
Deficit Financing

Monetary measures

It work through the adjustment in the quantity of money and the rate of interest. Monetary measures can be grouped further into two categories i.e., quantitative measures and qualitative measures.