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Equilibrium is not necessarily

established at full-employment
level
• Fig. Saving gap
Z C+I
R ’
C +I
E
C
Investme
H nt
G

45
ni & noi t p mus no C

˚
Income at employment at full
O Y’ YF employment

. known as under employment equilibrium. it is clear that NI will be established at full employment level only when planned investment demand(EG) is sufficient to fill saving gap between income and consumption(RH) at the full-employment level. • In figure. • From figure. • OY’ represents NI at which some resources will be unemployed. Cont. OYF represents. NI at full employment level.

• In this situation. . level of planned investment falls and the equilibrium level of national income also decline. NI will rise beyond OYF only in money terms not in real term. • If due to adverse changes in profit expectations of the entrepreneurs. which will lead inflationary pressure in the economy. • If aggregate demand increases beyond C+I’. Cont. then investment demand will be higher than RH. • However there is no guarantee that the investment demand will be equal to the saving gap corresponding to full-employment level of income.

Government Expenditure and National income • If we take into account the income generating effects of govt. expenditure(G) the equation for the equilibrium level on national income become. • Y = C+I+G where C = a+bY and I = Ia • Putting these value in the equation • Y = a+bY+ Ia + G • Or Y = 1/1-b(a+ Ia + G) .

govt. • It is assumed to be governed by growth and social welfare consideration and does not depend on NI. I and G) multiplied by the multiplier(1/1- b). . Cont. • Note: In simple Keynesian model of income determination. expenditure is treated as autonomous expenditure. • Thus it is clear that the equilibrium level of income is equal to the sum of three types of fixed autonomous expenditure(a .

we have seen that saving and investment will be equal only at the equilibrium level of national income. it means more money has been put into the income stream than has been taken out of it. • Now if intended investment is greater than intended saving. • The same can be explained in other way considering saving as withdrawal of money and investment as injection of money into the system. . Determination of National income: saving-investment approach • In simple Keynesian model of income determination.

Cont.. NI would expand.e. • On the contrary. it means that less amount of money has been put into the income stream than has been taken out of it. it will be in equilibrium. • But when investment is just equal to saving. • As a result. . it means national income will neither increase nor decrease i. • The result would be decrease in NI. if investment is less than intended saving.