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Terms used in Income Determination - The Investment Function, Macroeconomics | Macro Economics - B Com PDF Download

Income Determination

1. Aggregate Demand (AD) It refers to the total demand for final goods and services in an economy during a year.
(i) Components ofAggregate Demand
(a) Private consumption demand (C)
(b) Private investment demand (T)
(c)Demand for goods and services by the government or government purchases (G)
(d) Demand for net exports (X·M)
Thus, AD = C + I + G + NE

2. Aggregate Supply (AS) It refers to the total quantity of goods and services produced by all the producers in an economy during a year.
(i) Components ofAggregate Supply
(a) Consumption (C)
(b) Saving (S)
Thus, AS=C+S

3. Consumption Function It means a functional relationship between total consumption and total disposable income.
Thus, C = f (y)
C = Consumption
y= Income

4. Average Propensity to Consume APC = C/Y
C = Total consumption
Y = Total income

5. Marginal Propensity to Consume (MPC)
MPC =Δc/Δy

Here, Δc = Change in consumption
Δy = Change in income

6. Linear Consumption Function If the consumption function is given on the assumption of constant marginal propensity to consume. It is called linear consumption function.
c=‾c+BY; ‾c.0,0,b,1
Here, c = Consumption ,‾c = Auto nomous consumption,B = Marginal propensity to consume, Y = Level of income

7. Saving Function Saving function is a schedule showing a functional relationship between total saving and tot.al income.
Thus, S = F (Y)
Here, S = Total saving ,Y = Total income

8. Average Propensity to Save

APS=S/Y
Here, S = Total saving ,Y = Total income

9. Marginal Propensity to Save  MPS = ΔS/ΔY

Here, ΔS = Change in saving, ΔY = Change in income

10. Equilibrium Level of Output Equilibrium level of output in an economy is determined at a point where planned spending (C+l) equals the planned output or where C+I curve intersects the 45° line.

11. Effective Demand It is that level of aggregate demand which becomes effective in determining equilibrium level of income because it is equal to aggregate supply.

12. Autonomous Consumption It refers to minimum level of consumption even when income is zero, it is indicated by ‘A’ in the consumption function . C=A+B
13. Ex-ante Saving It is what the savers plan to save at different levels of income in the economy.

14. Ex-ante Investment Is what the investors plan or intend to invest at different levels of income in the economy.

15. Ex-post Saving and Investment They refer to realised saving and investment in the economy. Ex-post saving is always equal to ex-post investment.

16. Multiplter Additional investment (ΔI), generates additional income (ΔY), but income generated is many times more than the investment.
Multiplier is the ratio between increase in income (ΔY) and increase in investment (ΔI) .  Multiplier (K) = ΔY/ΔI

17. Full Employment Equilibrium It refers to that situation in the economy when AD = AS along with fuller utilisation of  labour force.

18. Under Employment Equilibrium It refers to that situation in the economy when AS = AD but without the fuller utilisation of labour force.

19. Parodox of Thrift Which states that as people become more thrift they end up saving less or same as before.

The document Terms used in Income Determination - The Investment Function, Macroeconomics | Macro Economics - B Com is a part of the B Com Course Macro Economics.
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FAQs on Terms used in Income Determination - The Investment Function, Macroeconomics - Macro Economics - B Com

1. What is the investment function in macroeconomics?
The investment function in macroeconomics refers to the relationship between the level of investment and the factors that influence it, such as interest rates, expectations of future profitability, and government policies. It represents the planned investment expenditure by firms and households in an economy. The investment function helps determine the level of aggregate demand and plays a crucial role in income determination.
2. How does the investment function impact income determination?
The investment function has a direct impact on income determination as it affects the level of aggregate demand in an economy. Higher levels of investment lead to increased demand for goods and services, which in turn stimulates production and employment. This results in higher income levels for households and businesses. Conversely, a decrease in investment expenditure can lead to a decrease in aggregate demand, potentially causing a decline in income.
3. What factors influence the investment function?
Several factors influence the investment function, including interest rates, expectations of future profitability, technological advancements, business confidence, and government policies. Lower interest rates make borrowing cheaper, encouraging firms to invest more. Positive expectations about future profitability and technological advancements can also increase investment. Additionally, business confidence and favorable government policies, such as tax incentives or infrastructure spending, can further stimulate investment.
4. How does the investment function affect economic growth?
The investment function plays a crucial role in promoting economic growth. Higher levels of investment lead to increased capital accumulation, which enhances productivity and output. This, in turn, leads to higher incomes and a higher standard of living. Investment in research and development, innovation, and infrastructure can also drive long-term economic growth by fostering technological progress and improving the overall efficiency of an economy.
5. How do changes in government policies impact the investment function?
Changes in government policies can have a significant impact on the investment function. For example, tax incentives or subsidies for investment can encourage firms to increase their investment expenditure. On the other hand, an increase in taxes or stricter regulations may discourage investment. Government spending on infrastructure projects can also directly contribute to investment and stimulate economic growth. The effectiveness of government policies in influencing the investment function depends on various factors, such as the stability of the policy environment and the overall business climate.
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