Determination of Income and Employment Class 12 Notes CBSE Macro Economics Chapter 4 PDF

The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create. The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is done to ensure that no bank is over lending. This is a legal requirement and is binding on the banks. The increase in the price of dollars due to rise in demand for imports indicates that the value of rupees in terms of dollars has fallen and the value of dollar in terms of rupees has increased.

With the increase in savings, not only the equilibrium income falls, but also savings decline. Exchange rates were determined by its worth in terms of gold. For example, if one unit currency A was worth one gram of gold, one unit of currency B was worth two grams of gold, currency B would be worth twice as much as currency A.

However, Friedman’s restatement was in any other case closer to the classical view in decreasing the scope for beneficial authorities intervention within the financial system. An even more influential work was his 1963 publication of A Monetary History of the United States. This ran counter to the then orthodox Keynesian interpretation that inflation was linked to employment, as modelled by the Phillips curve which predicted an inverse relationship between the two variables.

d PUC Economics Question Bank Chapter 10 Income Determination

Graphically it means the aggregate demand function can be obtained by vertically adding the consumption and investment function. This result is known as the Paradox of Thrift. If the equilibrium level of output is more than the full employment level, then it is called as excess demand.

At the March assembly of the Fed’s Open Market Committee, officials expressed concern that consumers may enhance their financial savings, thereby weakening and even aborting the financial enlargement. Multiple eventualities or points in time may be represented by including further IS and LM curves. In some variations of the graph, curves display restricted convexity or concavity. Shifts within the position and form of the IS and LM curves, representing changing preferences for liquidity, investment, and consumption, alter the equilibrium ranges of earnings and rates of interest. The IS-LM graph examines the connection between output, or GDP, and rates of interest. The paradox is, narrowly speaking, that complete saving might fall due to individuals’ attempts to extend their saving, and, broadly talking, that increase in saving may be dangerous to an economic system.

Linear Consumption Function

An apex body that controls, operates, regulates and directs the entire banking and monetary structure of the country is called Central Bank of the Country. In India RESERVE BANK OF INDIA is the Central Bank of India. Goods which are consumed by the ultimate consumers or meet the immediate needs of the consumer directly are called consumption goods.

Households receive income by selling the factor services. The values in this column are obtained by dividing change in TP by change in labour. The last column gives us a numerical example of average product of labour. The values in their column are obtained by dividing TP by labour. Write the differences between total utility and marginal utility.

In Britain Keynesian economics was formally rejected by Margaret Thatcher’s new government in 1979, ending the Post-war consensus. There had been initial unsuccessful attempts to ascertain free market favouring policies as early as 1970 by the federal government of Edward Heath. Furthermore, the dimensions of the government should be cut to the bone in order to allow the private sector to channel savings toward wealth-producing actions.

It happens at P where supply decisions match demand decisions. Briefly explain the effect of an increase in demand for imports in the foreign exchange market with the help of a diagram. In fact, revenue deficit is a part of fiscal deficit. A large share of revenue deficit in fiscal deficit indicates that a large part of borrowing is being used to meet its consumption expenditure needs rather than investment.

Equilibrium Level of Income

It is obtained by dividing the total revenue by the number of units of output sold. The average revenue is defined as total revenue give the meaning of paradox of thrift per unit of output. The above table shows the total product of labour, marginal product of labour and average product of labour.

As is given in the examination problem that when aggregate demand falls short of aggregate supply, then national income will decrease as shown in the above mentioned diagram. If all the people in the economy make an effort to save more, then the total savings of the community will not increase, on the contrary they will decrease. OP is the equilibrium price and OQ is the equilibrium quantity.

The paradox remains that if he had not been careful with his money in the first place, he would never have achieved his present wealth. Among the two income groups, a different set of values exist. The young clerk who makes his wife a present of a new dress when he hadn’t paid his house rent, is condemned as extravagant. Carefulness with money to the point of meanness is applauded as a virtue. Nothing in his life is considered more worthy than paying his bills. As for myself, I fall into neither of these categories.

Economic Paradox:

Paradox of Thrift states that individuals try to save more during an economic recession, which essentially leads to a fall in economic growth. Pareto’s efficiency is defined as the economic situation when the circumstances of one individual cannot be made better without making the situation worse for another individual. The concept of multiplier is diagrammatically presented with the help of AD and AS approach. What are the determinants of investment demand?

A few examples of services are the services of a doctor, teacher, lawyer, domestic servant etc. Now as individuals keep increasing the savings, now its the turn of the government to put the savings to productive / constructive use. Most governments have soverign funds like the Singapore, Japan, Taiwan govts, Gulf Arab govts etc, who invest their surplus in other countries. Some gulf Arab countries even plan to grow their investments so large that even after the oil is gone, they plan to maintain their standard of living on the returns on these investments. If we had free money there won’t be such thing as «too much savings», since the free market would balance itself from time to time.

Let us refer to the fourth line of the passage’The paradox remains that if he had not been careful with his money in the first place, he would never have achieved his present wealth’. Therefore, B will lie on higher indifference curve. Similarly, C has more bananas than B and therefore C will provide higher level of satisfaction than B and also lie on higher indifference curve than B. Thus, higher indifference curves give greater level of utility. Explain the features of indifference curves with the help of diagrams. The values of all goods and services can be expressed in terms of money.

• The last column gives us a numerical example of average product of labour.
• The correct answer is’thrift may lead to success’.
• It wants to promote its products in other countries and asks those govts to allow their people to stop worrying about their savings and spend on US products.
• Is the difference between the level of AD required to establish full employmentequilibrium and the actual level of AD.

This kind of supply situation is shown by a 45° line. Explain the effect of an autonomous change in aggregate demand on income and output. The aggregate demand function is parallel to the consumption function i.e., they have the same slope c. If the equilibrium level of output is less than the full employment of output, then it is called as deficient demand. This paradox is predicated on the proposition, put forth in Keynesian economics, that many economic downturns are demand-primarily based. For the Anglo-American economies, Keynesian economics typically was not officially rejected till the late 1970s or early 1980s.

How to use 2nd PUC Economics Question Bank Chapter 10 Income Determination

Where, TC is total cost and ‘q’ is quantity of output produced. Economic agents are those individuals or institutions which take economic decisions. They can be consumers, producers, government, corporation, banks, etc. These Rs 25 crore will, thus, become the income for others. This will continue till total increase in income becomes k times the increment of investment.

I think the Indian government has led the way by rejecting American war aircraft I think the rest of the country can do the same, in all products. It is best to view expenditure as investments and invest in local businesses as that would drive the economy and help sustain growth. In the given sentence a word has been emboldened. Select the best alternative for the bold word from the given options. If none follows, select option 5 as your answer.

Critically examine the Wiseman – Peacock hypothesis of public expenditure. How does public expenditure help in attaining economic stabilisation and higher levels of production and growth? Is Friedman’s quantity theory of money close to Classical or Keynesian approach to the aggregate demand for money? The investment, which is planned to be made by all the firms or entrepreneurs in the economy during a period, in the beginning of the period is called ex-ante investment. G includes both government consumption expenditure and Government investment expenditure.