Presentation on theme: "It includes the following areas:"— Presentation transcript:
1 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 presentations1 excel worksheet for interactive construction10 multiple choice questions (4 options)
2 Coursework(Sec1-39-11) by s.w. Leung Keynesian Theory of Income Determination : two-sector model using AE = AS ApproachCoursework(Sec )by s.w. Leung
3 Assumptions in NI Models a single concept of NI (Y)a constant level of potential income (Yf)existence of unemploymentconstant price level i.e. Y=Q since P=1
4 Two-sector model --- Keynesian Circular flow diagramE(AE) : Aggregate expenditureY(NI) : National incomeNext section
6 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
7 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).
8 A graphical approach (AE = AS) to income determination E function and Y-linecomponent of AEsimple algebra of income determinationconstruction
9 E function and Y-line E function E(AE) : Demand side E = C + I Y(AS) : Supply sideYEY-line(450)E = YConstruct a Y-line (450) : shows all the points where E equals YYE = Y = Q (re: assumption P=1)(E) expenditure in the economy equals (Y) income generated by producing (Q) output
10 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 : II : an autonomous function (doesn’t vary with Y)Aggregate expenditure function (E or AE)E = C + I a function of Y
11 Simple algebra of income determination Solution :E = C + IE = Y + 40 = YIn equilibrium E = Y(Ye)Y = Y0.4Y = 120Y = 300and C = (300) = 260Given : C = YI = 40Find Ye
12 constructionLet’s take C = Y and I = 40 to find Ye graphicallyAn excel worksheet (sheet 1) will be used to illustrate.next
13 Multiple Choice Exercise MCdemo25.htm demo1.wmf You come to the END !!!