Income Determination Test - 27

The size of the multiplier depends on the percentage of deposits that banks are required to hold as reserves. When the reserve requirement decreases, the money supply reserve multiplier increases, and vice versa.

Deficient demand occurs when Aggregate Demand falls short of the full employment level, leading to unemployment and underutilization of resources. Both fiscal and monetary measures can be employed to address this situation. Fiscal measures involve government intervention through changes in taxation and government spending to stimulate demand. Monetary measures involve actions by the central bank to influence the money supply and interest rates to encourage borrowing and spending. Therefore, both fiscal and monetary measures are used together to correct deficient demand and stimulate economic activity.

In economics, investment means the purchase of goods that are not consumed but , meant for creating further wealth. Capital goods are those goods used to produce consumer goods. So, investment is addition to the stock of capital.

The value of the investment multiplier relates to a change in autonomous investment due to change in income. It is measured as the ratio between the change in income and the change in investment. The investment multiplier shows a relationship between the initial increment in investment and the resulting increment in national income.

The multiplier (denoted by \(K\) ) represents the ratio of the change in national income ( \(\Delta Y)\) to the change in investment \((\Delta I)\). It measures the extent to which an initial change in investment leads to a larger change in national income through the multiplier effect. Therefore, option (b) is the appropriate expression for the multiplier.

In the Keynesian viewpoint, the equilibrium level of income and employment in the economy will be established where AD (Aggregate Demand) equals AS (Aggregate Supply). This is because Keynes argued that in the short run, changes in total spending (AD) primarily determine fluctuations in economic activity and employment. When AD equals AS, there is neither upward nor downward pressure on prices, and the economy operates at its equilibrium level of output and employment.

The most realistic value for MPC is greater than 0 but less than 1, indicating that individuals spend some portion of additional income on consumption and save the rest.

The coefficient (1-b) is also known as MPS because it represents the proportion of additional income that is saved rather than spent.

"General Theory of Employment, Interest and Money" is a seminal work authored by J.M. Keynes, a renowned economist. Published in 1936, it fundamentally revolutionized economic thought by challenging classical economic theories. Keynesian economics, derived from this book, advocates for active government intervention to manage economic fluctuations. 

When the economy experiences deficient demand, fiscal measures are employed to stimulate economic activity. Increasing government spending on public works projects injects money into the economy, creating jobs and boosting demand. Reducing taxation increases disposable income for consumers and businesses, encouraging spending and investment. Additionally, reducing public debt can free up resources for future spending or tax reductions. Therefore, all of these fiscal measures can be adopted simultaneously to address deficient demand and stimulate economic growth.