National Income Determination and Investment Multiplier Class 12 Notes

As additional investment was made of ₹1000 cr. AS (C+S) comprises Consumption expenditure and Saving. It is the total output of goods and services.

In this model, I is autonomous which means, it is the same no matter whatever is the level of income. Is the total autonomous expenditure in the economy. In reality, these two components of autonomous expenditure behave in different ways. Or the marginal propensity to consume. It may be explained as a rate of change of consumption as income changes.

Higher is the consumption of one, higher would be the income of the other. It is on the concept of expenditure of one is the income of the other. Maximum value can be infinity and minimum value can be 1.

MCQs for Class 12

At that level APS will be negative .when the APS is negative APC will be greater than one. Investment means addition to the stock of capital good, in the nature of structures, equipment or inventory. Which states that as people become more thrifty they end up saving less or same as before.

Higher the value of MPC, the higher the multiplier, and vice-versa. It was at that time that J.M. This led to emergence of Macroeconomics as a separate branch of economics. Defined as the ratio of change in the income to the change in the investment. When can the APC be equal to one?

At this level planned savings are equal to planned investment. The Economy would be in equilibrium at point E where saving and investment intersect each other. At this level planned savings are equal to planned investments. Clearly aggregate supply has two components, namely, consumption expenditure and savings. AS curve is depicted in the adjoining Fig.

Relationship between Investment Multiplier and MPC (Marginal Propensity to consumer).

Does not necessarily mean the level of output at which everyone is employed. When 1478.png changes the line shifts upwards or downwards in parallel. When c changes, however, the line swings up or down.

Flexibility of prices and wages. Even if at any time there is unemployment, it must be temporary because in a free economy, flexibility of prices and wages automatically bring about full employment. Suppose at a given wage rate there is unemployment which implies that supply of labour is greater than demand for it. Competition among labour to seek employment would lead to fall in wage rate. As a result demand for labour would continue to rise until unemployment is removed from the labour market. Thus wage-price flexibility is the built-in stabiliser to ensure full employment.

It refers to a situation when an equilibrium between AS and AS takes place at less than full employment level. Is the equilibrium level of output corresponding to point E. It is assumed that Investment is autonomous i.e. it is not influenced by the level of income.

• As is given in the examination problem that when aggregate demand falls short of aggregate supply, then national income will decrease as shown in the above mentioned diagram.
• In such case, value of multiplier will be comparatively less.
• Graphically it means the aggregate demand function can be obtained by vertically adding the consumption and investment function.
• As we already have discussed, the higher is the MPC, the higher would be the investment multiplier.

Decision whether to invest or not The investor goes on making additional investments until M.E.I becomes equal to the rate of interest. If M.E.I is greater than the rate of interest, the investors has to increase the investment and if the rate is higher than the M.E.I, no investment https://1investing.in/ is to be made. The consumer goods industry will have an extra income of Rs 50 crore. Assume the MPC for the whole society is 0.5, people working in these consumer goods industry would again spend 50% of their additional income of Rs 50 crore on more consumer goods.

NCERT  Solutions for Class 12 Macro Economics Chapter-6 National Income Determination and Multiplier

But as per the concept of Investment Multiplier, the increment in the income is many times more than the initial increase in the investment. An economy can be in equilibrium at less than full employment level Economic system does not ensure automatic equilibrium at full employment as believed by Classicals. There can be equilibrium even at less than full employment level whereas according to Classicals equilibrium is always at full employment.

The given value of autonomous consumption is incorrect. Explain the income propagation process due to change in investment. If the value of marginal propensity to consume is 0.6, calculate the value of multiplier.

When, at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final goods or product market reaches its equilibrium. Aggregate demand for final goods consists of ex ante consumption, ex ante investment, government spending etc. The rate of increase in ex ante consumption due to a unit increment in income is called marginal propensity to consume. For simplicity we assume a constant final goods price and constant rate of interest over short run to determine the level of aggregate demand for final goods in the economy.

Let’s understand this whole process with the following table. As in each successive round, there is an increase of saving by 20% of the previous round. This is the second-round what can be maximum value of investment multiplier increase. It equals to 80% of the first-round increase. The higher is the income of the second one more is the expenditure, the higher would be the income of the third one.

When an additional investment is done in the economy that will increase the National Income Determination and Multiplier many times. Investment Curve is parallel to the axis as the investment is autonomous, it is independent of change in income. This is called the situation of effective demand. Effective demand refers to that level of AD that becomes effective because it is equal to AS. The equilibrium output is determined in the two-sector model, only households and firms are assumed to be present and there is no government and foreign sector. Now suppose MPC is 0.5, people working in the investment industry will spend Rs 50 crore on new consumption goods.

Income Determination And Investment Multiplier Class 12 Notes

Suppose, the government of a country spends Rs 100 crore on building roads. National income of the country automatically rises by Rs 100 crore in Round 1. Explain the process of working of the ‘investment multiplier with the help of a numerical example. Value of investment multiplier varies between zero and infinity.

Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure is Rs 50 crores, and MPS is 0.2 and level of income is Rs 4000 crores. State whether the economy is in equilibrium or not . «Demand creates its own supply» Unlike Classicals; Keynes believed that it is the demand that creates supply and not that supply creates demand. In fact, aggregate demand in the economy is the driving force that determines the level of output, employment and income. It is because the level of aggregate supply is constant during short period.

An increase in mps, or a decline in mpc, reduces the slope of the AD line and it swings downwards. We depict the situation in Fig. In a two sector model, there are two sources of final demand, the first is consumption and the second is investment.

Investment refers to the expenditure on producer goods. So as an investment in ₹ 100 crore raises the income of suppliers of such goods by ₹ 100 crores. This is the first-round increase. Not only an Increase in Income depends on the initial increase in investment.