Determination of Income and Employment — Practice Quiz

Consumption, Investment

In a two-sector economy (without government and foreign trade), aggregate demand consists of only consumption (C) and investment (I). Government expenditure and net exports are included in three-sector and four-sector models respectively. Savings is not a component of aggregate demand.

Investment is autonomous

In the simple Keynesian model, investment is assumed to be autonomous, meaning it is independent of the current income level. It is represented as Ī (I bar), a constant value determined by factors other than current income.

Ex ante aggregate demand equals ex ante aggregate supply

Equilibrium in the goods market occurs when planned (ex ante) aggregate demand equals planned (ex ante) aggregate supply. At this point, there is no tendency for output or income to change.

It measures the ratio of change in income to change in autonomous expenditure, Its value is 1/(1-c) where c is MPC, Higher MPC leads to higher multiplier

The multiplier shows how much total income changes due to a change in autonomous expenditure. Its formula is 1/(1-c) or 1/MPS. Higher MPC means lower MPS, leading to a higher multiplier. It is always positive and applies to any autonomous expenditure change.