Explanation
Break even point refers to the point where the income=consumption or savings= 0. It is the point where the consumption curve intersects the 45 degree line.
Aggregate Demand refers to the desired level of expenditure in the economy during an accounting year. It is what people wish to spend on the purchase of goods and services during an accounting year.
Aggregate demand= C+I+G+ (X-M) where
C= Consumption expenditure
I= Investment expenditure
G= Government expenditure
(X-M)= Net export
Aggregate demand curve is upward sloping showing a positive relation between level of income and overall expenditure in the economy. The curve intercepts on Y-axis because even at zero level of income, there is some consumption which is required for the very existence of life.
1. Autonomous consumption refers to that consumption which occurs when there is no income in the economy. It is the minimum level of consumption that takes place in the economy.
Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings. It can never be negative as it is a change in the value when the value of income changes while it can be equal to one if the overall change in the value of income is used in savings.
Break even point refers to the point where the income=consumption or savings= 0. Therefore, break even point in the following diagram is point B.
The equilibrium is reached only when Investment(I) equals Savings(S) because at this level there is no tendency for income and output to change. In the diagram the equilibrium is at E1 where savings intersects investment curve At this point, I=S. When S is more than I , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in I and rise in income means rise in S. Both continue to rise till they reach E1, S=I. When S is less than I, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till S becomes equal to I. So, equilibrium takes place only at point E1, when S=I.
Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.
Multiplier(k) => Change in income / change in investment = 1/ {1-MPC(c)} where c is the marginal propensity to consume.
If MPC= 0.6, then
Multiplier(k) = 1/( 1 - 0.6) = 1/ 0.4 = 10/4 = 2.5 times.
Therefore, the investment multiplier is 2.5.
Multiplier(k) => Change in income / change in investment = 1/ MPS(s) where s is the marginal propensity to save.
So if MPS=MPC then ,
We know that MPC + MPS =1
=> 2 MPS= 1
=> MPS= 1/2
=> MPS= 0.5
Multiplier (K) = 1/ MPS= 2 times.
Hence, the value of the multiplier is two.
If MPS= 0.20 and change in investment is by Rs. 400 crores, then
Multiplier(k) => Change in income / change in investment = 1/ MPS
=> change in income/ 400 = 1/0.20
=> change in income/ 400 = 5
=> change in income = 5 * 400 = 2000 crores.
Therefore, Income is increased by Rs. 2000 crores.
Please disable the adBlock and continue. Thank you.
