Unit : 3
What Are Determination Of Income And Employment ?
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).
It refers to the output that is planned by the producers in a particular period of time.
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.
- Average propensity to consume
It refers to the ratio of the consumption expenditure and a particular level of income.
- Marginal propensity to consume
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.
- 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.
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.
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.
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’.
When in an economy aggregate demand falls short of ‘aggregate supply at full employment’ the demand is said to be a deficient 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.
Monetary Measures to Correct Deficient Demand and Excess Demand
- Bank rate
- Open market operations
- Changes in legal reserve ratio such as CRR and SLR
- Repo rate
- Margin requirements
- Moral suasion
- Credit rationing