Income Determination Test - 25

The Breakeven level of an economy is C=Y.

Increase in aggregate demand (AD) at the equilibrium level of income and employment leads to an increase in all of the given factors: employment, production, and income. When aggregate demand increases, firms respond by increasing their production to meet the higher demand, which requires hiring more workers. This increase in employment leads to higher incomes for workers, which further stimulates consumption and aggregate demand, creating a multiplier effect. 

The Keynesian Multiplier is influenced by both the Marginal Propensity to Save (MPS) and the Marginal Propensity to Consume (MPC). The multiplier effect is determined by the relationship between changes in consumption and changes in income. When individuals save more (higher MPS), they spend less, reducing the multiplier effect. Conversely, when individuals consume more (higher MPC), they spend more, amplifying the multiplier effect. Therefore, both MPS and MPC play crucial roles in shaping the magnitude of the Keynesian multiplier.

When the Aggregate Demand exceeds the full employment level, it creates an inflationary situation, known as the inflationary gap. This gap signifies an excess demand in the economy, leading to rising prices and inflationary pressures. It reflects the difference between the actual level of demand and the level of demand consistent with full employment.

According to the saving-investment viewpoint, income-employment equilibrium will be determined at a point where saving (S) equals investment (I). This equilibrium condition implies that total saving in the economy equals total investment, ensuring that the resources available for investment match the resources saved by households and businesses. When S equals I, there is no excess saving or excess investment, leading to a stable equilibrium level of income and employment.

The value of Keynesian Investment Multiplier depends on the Marginal Propensity to Consume (MPC). The multiplier effect is the result of the cycle of spending generated by initial injections of investment. The MPC determines how much of each additional dollar of income is spent, thus influencing the total increase in national income.

APS = S/Y

APS is defined as ratio of income that is saved out of total income.

The minimum value of the multiplier can be 1 when there is one time change in income or when MPC= 0 and the maximum value of the multiplier can be Infinity when there in infinite times of change in income or MPC=1.

According to Keynes, investment implies "Real Investment" rather than just financial transactions. Real investment involves the purchase of physical assets like machinery, equipment, and infrastructure, which contribute to the productive capacity of the economy. This distinction is crucial in Keynesian economics as it focuses on stimulating real economic activity through increased investment to address unemployment and economic downturns. Financial investments, such as buying stocks or bonds, are considered secondary to real investment in driving economic growth and employment.

The formula for the multiplier is \(\frac{1}{1-M P C}\).

Given that MPC (Marginal Propensity to Consume) is 0.5, we substitute it into the formula: \(\frac{1}{1-0.5}=\frac{1}{0.5}=2\).

Now, to find the income generated, we multiply the initial investment by the multiplier: 100 Rs crores \(\times 2=200\) Rs crores.