Aggregate demand &

aggregate supply

Macro Economics: Part-19

Unit-3 Determination of income & employment.By- Gobind Rawat

12th class ECONOMICSchp-7

CBSE Class XII Economics 2020-21

Part A: Introductory Macroeconomics

Unit 1 - National Income and Related Aggregates (10 Marks)

What is Macroeconomics?

Basic concepts in macroeconomics: consumption goods, capital goods, final goods, intermediate

goods; stocks and flows; gross investment and depreciation.Circular flow of income (two sector model); Methods of calculating National Income - Value Added or

Product method, Expenditure method, Income method.

Aggregates related to National Income:

Gross National Product (GNP), Net National Product (NNP), Gross and Net Domestic

Product (GDP and NDP) - at market price, at factor cost; Real and Nominal GDP.GDP and Welfare

Unit 2 - Money and Banking (6 Marks)

Money - meaning and supply of money - Currency held by the public and net demand deposits held

by commercial banks.

Money creation by the commercial banking system.

Central bank and its functions (example of the Reserve Bank of India): Bank of issue, Govt. Bank, Banker's Bank, Control of Credit through Bank Rate, CRR, SLR, Repo Rate and Reverse Repo

Rate, Open Market Operations, Margin requirement.

Unit 3 - Determination of Income and Employment (12 Marks)

Aggregate demand and its components.

Propensity to consume and propensity to save (average and marginal). Short-run

equilibrium output; investment multiplier and its mechanism. Meaning of full employment

and involuntary unemployment.Problems of excess demand and deficient demand; measures to correct them -

changes in government spending, taxes and money supply.

Unit 4 - Government Budget and the Economy (6 Marks)

Government budget - meaning, objectives and components.

Classification of receipts - revenue receipts and capital receipts; classification of

expenditure – revenue expenditure and capital expenditure.

Measures of government deficit - revenue deficit, fiscal deficit, primary deficit their meaning.

Unit 5 - Balance of Payments (6 Marks)

Balance of payments account - meaning and components; balance of payments deficit-

meaning.Foreign exchange rate - meaning of fixed and flexible rates and managed floating.

Determination of exchange rate in a free market.

Aggregate demand

Meaning- aggregate demand is the demand for all goods and services of an economy during a period of time.Aggregate demand is the total expenditure of a household as a consumption expenditure & expenditure of producer as a investment expenditure during an accounting year.

AD = C+ I

Components of Aggregate Demand

1. Private households consumption demand (C)

2. Private Investment demand (I)

3. Demand for goods and services by the government (G) and

4. Demand for net exports (X-M)

Thus AD= C+I+G+(X-M)

Aggregate Demand

Income C I AD

0 20 20 40

40 50 20 70

80 80 20 100

120 110 20 130

160 140 20 160

200 170 20 190

240 200 20 220

280 230 20 250

320 260 20 280

AD=C+I

c

I

Aggregate Supply

Aggregate Supply refers to the total supply of goods and servicesby all the producers in the economy. In other words aggregatesupply is total amount of money which is paid to factors ofproduction against their factor services for the production of goodsand services in an economy. Or AS is the total value of outputavailable for purchase by the economy in a given period.

Thus AS= C+S

Aggregate Supply

Aggregate Supply Schedule

Income C S AS=C+S

0 20 -20 0

40 50 -10 40

80 80 0 80

120 110 10 120

160 140 20 160

200 170 30 20045o

AS=C+S

Consumption and Saving Functions

The consumption function, or Keynesian consumption function, is an economic formula that represents the functional relationship between total consumption and gross national income.

According to Keynes it is a fundamental psychological law that as incomeincreases, consumption also increases but less than the increase inincome

significance-1.There is always some minimum level of C, even when Y is 0 , this is called autonomous consumption.2.Consumption is positively related with income.3. Income is divided into two parts C & S. Increase in C is less than the increase in Y.

Y C

0 20

50 60

100 100

150 140

200 180

CONSUMPTION FUNCTION – TABULAR PRESENTATION

CONSUMPTION FUNCTION – DIAGRAMMATIC PRESENTATION

Y C

0 20

50 60

100 100

150 140

200 180

The consumption function is expressed as:

C= C + bY

C – consumption function.C- autonomous consumption ( minimum level of consumption)

b- it refers to marginal propensity to consume. ( it is a rate at which C increases in response to an increase in Y.

MPC = ΔC/ ΔY

Y= income.

At every level of C and Y, then the consumption function will be.

Y C

0 20

50 60

100 100

150 140

200 180

At every level of C and Y, then the consumption function will be.

1.Y=0 C= 20 +0.8(0)= 20+0

= 202.

C= C + bY

MPC = ΔC/ ΔY

MPC = 40/ 50= 0.8

Saving Functions

The consumption function represents the functional relationship between total saving and gross national income.

Y C S

0 20 -20

50 60 -10

100 100 0

150 140 +10

200 180 +20

significance-1.S- Line start from – 20 . It means when Y=0 then there is minimum consumption ie 20.2.saving is positively related with income3.S is always lower than Y, because it is part of Y.

SAVING FUNCTION –DIAGRAMMATIC PRESENTATION

Y C S

0 20 -20

50 60 -10

100 100 0

150 140 +10

200 180 +20

The saving function is expressed as:

S= -C + (1-b)Y

S – Saving function.C- autonomous saving.

b- it refers to marginal propensity to consume. ( it is a rate at which S increases in response to an increase in Y.

MPC = ΔS/ ΔY

Y= income.

At every level of C and Y, then the consumption function will be.At every level of C and Y, then the consumption function will be.

1.Y=0 S= -20 +0.2(0)= -20+0

= -202.

MPS = ΔS/ ΔY

MPS = 10/ 50= 0.2

Y C S

0 20 -20

50 60 -10

100 100 0

150 140 +10

200 180 +20

S= -C + (1-b)Y

Home work

Q1. in an Economy autonomous consumption is 40, income is 200 and MPC is 0.5, find out the C-Function and S-Function.

Q2. in an Economy autonomous consumption is 60, income is 1000 and MPC is 0.7 then find out the C-Function and S-Function.

Q3. find out S when C= 200 , MPS = 0.4 and y= 1000

Propensities

Propensity to consume

Propensity to save

APC MPCAPS MPS

APC MPC

Propensity to consume

APC is the ratio bw consumption and income.

APC = C/Y

Consumption is positively related with income.

MPC is the ratio bw change in consumption and change in income.

MPC = ΔC/ Δ Y

MPC is constant at all level of income.As income increases APC falliing.

APC

In situation -1 ( APC>1)

In situation -2 ( APC=1)

In situation -3 ( APC<1)

MPC

APS MPS

Propensity to save

APC is the ratio bw Saving and income.

APS = S/Y

saving is positively related with income.

MPC is the ratio bw change in saving and change in income.

MPS = ΔS/ Δ Y

MPS is constant at all level of income.

As income increases APS Increasing.

APS = 1-APC

MPS = 1-MPC

APS

In situation -1 ( APS is negative)

In situation -2 ( APS=0)

In situation -3 ( APC<1)

MPS

Concept of short runequilibrium

Macro Economics: Part-20

12th class ECONOMICSchp-8

Unit-3 Determination of income & employment.By- Gobind Rawat