Question

What will happen to equilibrium levels of income consumption and savings when wages and prices are fixed

Answer 1

Answer:

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Explanation:

National income, (GNI) or national output (GNP) is the total output available to satisfy peoples wants. A rising GNP implies economic growth. However, GNP does not always show a steady upward movement. Sometimes it moves up and sometimes it moves down. Thus economists are interested in knowing why GNP shows fluctuations. To answer this ques­tion we need a theory of national income determination.

Such a theory was first presented in a systematic way by J.M. Keynes in 1936. The theory which explains the level of national income and changes therein is called the theory of income determination. To be more specific, the theory of income determination seeks to find out the equilibrium level (value) of national income. (a) Wages and price are rigid. Thus, if aggregate demand increases production (GNP) will increase, wages and prices re­maining unchanged. In fact, Keynes assumed output adjustment and not price adjustment,

(b) The economy is having unemployed resource and idle capacity. This means that if aggregate demand increases it is possible to increase production immediately to meet the extra demand. Thus according to Keynes there is not such thing as ‘automatic full employment’ as has been postulated by the classical economists,

(c) Thirdly, all investment is autonomous and thus independent of national income (i.e., independent of income),

(d) Finally, consumption is partly autonomous and partly induced (i.e., dependent on income).