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**It includes the following areas:**

Keynesian Theory of Income Determination : two-sector model using AE=AS Approach This courseware is designed for revision purposes after finishing the above topic. It includes the following areas: 13 power point presentations 1 excel worksheet for interactive construction 10 multiple choice questions (4 options)

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**Coursework(Sec1-39-11) by s.w. Leung**

Keynesian Theory of Income Determination : two-sector model using AE = AS Approach Coursework(Sec ) by s.w. Leung

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**Assumptions in NI Models**

a single concept of NI (Y) a constant level of potential income (Yf) existence of unemployment constant price level i.e. Y=Q since P=1

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**Two-sector model --- Keynesian**

Circular flow diagram E(AE) : Aggregate expenditure Y(NI) : National income Next section

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**Two sectors : Household & Firm**

Circular flow diagram Two sectors : Household & Firm C National Income Household National Expenditure S Financial market C : consumption I S : saving I : investment Y : Income generated E : Payments for goods & services Y Firm E

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**E (AE) : Aggregate expenditure**

In a two-sector economy, firms (F) produce consumption goods (C) and investment goods (I) , that means expenditure (E) in the economy is on either C or I ; and we get an income-generated function. E = C + I

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**Y(NI) : National income**

On the other hand, income (Y) received by households (H) is either consumed (C) or saved (S). To complete the flow of income and expenditure, E = Y, we get the equilibrium income (Ye).

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**A graphical approach (AE = AS) to income determination**

E function and Y-line component of AE simple algebra of income determination construction

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**E function and Y-line E function E(AE) : Demand side E = C + I**

Y(AS) : Supply side Y E Y-line(450) E = Y Construct a Y-line (450) : shows all the points where E equals Y Y E = Y = Q (re: assumption P=1) (E) expenditure in the economy equals (Y) income generated by producing (Q) output

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**Component of AE Consumption function : Cf Investment function : I**

Cf = C + cY a function of Yd (in a two-sector model Y = Yd) C : intercept on E-axis (amount consumed when income is zero) c : slope of Cf (c is the marginal propensity to consume) Investment function : I I : an autonomous function (doesn’t vary with Y) Aggregate expenditure function (E or AE) E = C + I a function of Y

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**Simple algebra of income determination**

Solution : E = C + I E = Y + 40 = Y In equilibrium E = Y(Ye) Y = Y 0.4Y = 120 Y = 300 and C = (300) = 260 Given : C = Y I = 40 Find Ye

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construction Let’s take C = Y and I = 40 to find Ye graphically An excel worksheet (sheet 1) will be used to illustrate. next

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**Multiple Choice Exercise MCdemo25.htm demo1.wmf**

You come to the END !!!

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25 Demand-Side Equilibrium: Unemployment or Inflation? A definite ratio, to be called the Multiplier, can be established between income and investment.

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