BY PGP GROUP 6

Adarsha Chaubey-110066
Anurag Kumar-110074
Jyotsna Prakash-110082
Nitish Kumar Sinha-110090
Ravi Kumar Mahto-110098
Shruti-110106
Tarun Kumar-110114
 2 Sector Model
• Deviation for Income
AS
Y= a+ by+ I
C,I
Y- bY= a + I AD
Y=(a + I)/(1-b)
CPI
• Deviation of Multiplier
C,I
Y=C+I
Y+ ΔY= C + ΔC + I + ΔI
ΔY= ΔC+ ΔI
ΔY= bΔY + ΔI ∑QnPn
ΔY- bΔY= ΔI
ΔY= ΔI*(1/(1-b)
ΔY/ ΔI= 1/1-b
 Example of 2 Sector Model
• C=100+0.75I ,I=200 (Static Investment)
Solution- since, Y=(a + I)/(1-b)
=(100+200)/(1-0.75) = 300/0.25 = 300*4
Y=1200
C= a + BY
=100+0.75*1200 = 1000

S= Y-C
=1200-1000
= 200

 b= MPC = 0.75
MPC=0.25 (1-MPC)
 Paradox of thrift
Definition: Paradox of thrift was popularized by the renowned economist John
Maynard Keynes.

It states that individuals try to save more during an economic recession,

which essentially leads to a fall in aggregate demand and hence in
economic growth. Such a situation is harmful for everybody as investments
give lower .
Reference- https://economictimes.indiatimes.com/definition/paradox-of-thrift
 Paradox of Thrift
• MPC decreases from 0.75 to 0.60
• MPS increases from 0.25 to 0.40
New Y= 300*(1/(1-0.60))
=300/0.40
Y=750
So income decreases from 1200 to 750, if consumption decreases and savings
increases.
 Dynamic Multiplier
• Given, MPC=0.8, I=100

MPS MPC Y Change

100
20 80 +80 ΔY1
16 64 +64 ΔY2
. . . .
. . . Yn-1
Total=100 400 500

Y= ΔY1 + ΔY2 + ΔY3 + ……+ Δyn-1 In full employment model, multiplier

Y= ΔI + ΔI.b + ΔI.b2 + ……..+ ΔI.bn-1n-1
Impact is less, such as in USA.
Y= ΔI ( 1+b+b2…..+bn-1n-1)
Y= ΔI*(1/1-b)
 3 Sector Model
• In 3 Sector Model few elements included such as Tax(T), Expenditure(G), Transfer
Payment( GT)
AD= C+ I + G
AS= C+ S + T
Assumption- G=T, S=I ,no export/import, no foreign sector ,other things are constant. AS

C= a+ b(Y-T) (Tax deduced) C+I+G

C=a+ bY- bT C,I,G
Y=a+ bY- bT+ I+G C=a+bY
Y-by=a- bT+ I+ G
Y=(a- bT+ I+ G)*(1/a-b)

∑QnPi
 Example of 3-Sector Model
• C=100+0.75Y
I=100, G=100=T

Since Y=(a- bT+ I+ G)*(1/a-b)

Y=(100-0.75*100+200+100)*(1/1-0.75)
Y=1300

C=100+0.75Y
=100+0.75*1300
=1075
S=Y-C
S=1300-1075
=225
 3-Sector Model
C= a+ b( Y- T+ GT) (Y(Personal income)-taxes)
Y= a+ b(Y- T+ GT)+ I+ G
Y- bY=a- bT+ bGT+ I+ G
Y=(a- bT+ bGT+ I+ G)*(1/1-b)

C=100+0.75Y
I=200, G=100, GT=500
Y=(100-0.75*100+0.75*500+200+100)*(1-0.75)
Y=1450

C=100+0.75*1450
=1187.5
Case1- T= Lumpsum Tax (Fixed)
 3 Sector Model
• Case 2- T= T+ tY (T= fixed tax, tY= Direct tax)
C= a+ b(Y- T- tY+ GT)
Since Y= C+I+G

Y=a+ bY- bT- btY+ bGt+ I+ G

Y- bY+ btY=a- bT+ bGT+ I+ G
Y(1-b+bt)= a- bT+ bGT+ I+ G
Y=(a- bT+ bGT+ I+ G)*(1/1-b+bt)
Y=(a- bT+ bGT+ I+ G)*(1/1-b(1-t))
 Example
• C=100+0.75Y
I=200, GT=50, G=T=100
T=25+0.1Y

Since, Y=(a- bT+ bGT+ I+ G)*(1/1-b+bt)

Y=(100-0.75*100+0.75*50+200+100)*(1/(1-0.75+0.75*0.1))
Y=1115.38
C=100+0.75Y
=936.53