ECONOMIC AIL

DETERMINATION OF
INCOME AND
EMPLOYMENT
Determination of Equilibrium Level
• AD :- It refers to the total value of final goods and services
which all the sectors of an economy are planning to buy at a
given level of income during a period of year.
• AS :- It refers to money value of final goods and services
that all the producers are willing to supply in an economy in a
given time period.
• AD = AS ......(1)
•C+I=C+S ......(2)
•S=I (BY ADDING)
Two Approaches For Determination
Of Equilibrium Level.
• Aggregate Demand-Aggregate Supply Approach (AD-AS Approach)
• According to Keynesian theory, the equilibrium level of income in an
economy is determined when aggregate demand, represented by C+I
curve is equal to the total output (Aggregate Supply or AS) .
• Saving-Investment Approach (S-I Approach)
• According to this approach , the equilibrium level of income is
determined at a level , when planned savings (S) is equal to planned
investment (I).
Equilibrium level

i) Full employment level

ii) Underemployment level
iii) Over full employment level
Full employment equilibrium
• It refers to a situation when the aggregate demand is equal to the
aggregate supply at full employment level
Underemployment level
• It refers to a situation when the aggregate demand is equal to the
aggregate supply when the resources are not fully employed .
Over full Employment equilibrium
• It refers to a situation when AD is equal to AS beyond the
full employment level.
Investment Multiplier
• Keynes believed that an initial increment in investment increases the
final income by many times.
• Multiplier (K) is the ratio of increase in national income(∆ Y) due to an
increase in investment(∆ I).
• K=∆Y/∆I
 Algebraic relation between
multiplier and MPC
• Y=C+I
• ∆Y= ∆ C+ ∆ I
• Dividing both sides by ∆ Y
• ∆ Y/ ∆ Y=∆ C/ ∆Y+ ∆ I/ ∆ Y
• 1= MPC+1/K
• OR
• K=1/MPC
Diagrammatic Presentation of
Multiplier
 Conclusion
• Keynes assumed that in the short run, supply condition remains the
same.As one can take supply side to side to be given. Keynes focused
onthe demand side. In the short run , thus it is the level of
employment and output . Given the supply side , the hiher the
aggregate demand , the higher would be the equilibrium level of
employment and income , until the full employment is reached.
Project
Project done
done by:
by: K.S.DHANUSH
K.S.DHANUSH KUMAR
KUMAR
XII
XII “C”
“C”
APS
APS ASC
ASC C&C
C&C