written notes of chapter (income determination and multiplier?) of class 12 th
Answers
Answer:
. Determination of equilibrium level of national income
Or
Keynesian theory of income and employment
(a) It refers to that point which has come to be established under the given condition of aggregate demand and aggregate supply, and has tendency to stick to that level under this given condition:
Condition to get equilibrium level of NY
• AD = AS
• Investment = Saving
How is Investment = Saving?
Here,
AD = AS
C + I = C + S
I = C + S – C
I = S
(b) If due to some disturbance, we divert from that position, then the economic forces will work in such a manner so as to drive us back to the original position,
i. e., aggregate demand is equal to aggregate supply.
(c) Any movement from that point would be unstable. In short, it is a position of rest.
(d) It can be explained with the help of following schedule and diagram:
national-income-determination-and-multiplier-cbse-notes-for-class-12-macro-economics-1
(e) Figure B is derived from figure A. In figure A at point P, income is equal to consumption, which is known as to be breakeven point. Corresponding to point P, we derive point P1; in figure B, where saving is equal to zero. In figure A, the equilibrium level of national income is attained at point E, where aggregate supply = aggregate demand. Corresponding to point E, we derive the point E1, where saving = investment.
national-income-determination-and-multiplier-cbse-notes-for-class-12-macro-economics-2
2. Determination of equilibrium level of national income through Aggregate demand-Aggregate Supply Approach
(a) It refers to the point that has come to be established under the given condition of aggregate demand and aggregate supply, and has tendency to stick to that level under this given condition where Aggregate Demand = Aggregate Supply.
(b) If due to some disturbance, we divert from that position, the economic forces will work in such a manner so as to drive us back to the original position, i.e., aggregate demand is equal to aggregate supply.
(c) In the above mentioned figure, at point P, income = consumption, which is known as to be a break-even point. The equilibrium level of national income is attained at point E, where aggregate demand = aggregate supply.
(d) If due to some disturbance we divert from our position, like when AD > AS [at Y2], then, production will have to be increased to meet the excess demand. Consequently, national income will increase. As we know positive relationship exists between national income and consumption, so consumption will increase, which will thereby increase the aggregate demand till we reach the equilibrium.
(e) As against it, when AD < AS [at Y1], then there would be stockpiling and producers will produce less. National income will fall and as a result consumption will start falling, which will thereby fall the aggregate demand till we reach the equilibrium.