ED and Income determination

# ED and Income determination - line OY passing from the...

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ED and Income determination: If we set aside induced private investment expenditure for the time being then we can relate Effective Demand for consumption goods and the levels of income that it can generate. Since consumption expenditure is likely to be deficient, public expenditure (G) is to be added to it in the form of autonomous investment . The two together result in aggregate or effective demand and help to determine levels of income. This is also known as aggregate expenditure (AE) approach to income determination. ED 1 = Y 1 = G 1 + by 1 ED 2 = Y 2 = G 2 + by 2 ED 3 = Y 3 = G 3 + by 3 Let’s present this process of income determination with the help of a figure : In the figure we find levels of income measured along the X axis and levels of effective demand or aggregate expenditure measured along the Y axis G 1 ED 1 , G 2 ED 2 and G 3 ED 3 are three different levels of effective demand. The distances G 1 , G 2 and G 3 along the vertical axis show autonomous investment expenditure of the public authority at respective levels of the effective demand. The

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Unformatted text preview: line OY passing from the origin is a 45 0 line which shows the values of effective demand if the entire income is consumed (b = 1) and in which case autonomous investment would not be necessary. The points of intersection e 1 , e 2 and e 3 between the three effective demand curves and the OY straight line are equilibrium positions. At points e 1 , e 2 and e 3 the levels of income generated are Y 1 , Y 2 and Y3 respectively. While determining levels of income, we have not included induced investment expenditure (I), however its inclusion would not make any difference except that the curves ED 1 , ED 2 and ED 3 would have then been shifted a little upwards. With their inclusion we can write the three ED equations as follows : Y 1 = G 1 + b (Y 1 ) + I Y 2 = G 2 + b (Y 2 ) + I Y 3 = G 3 + b (Y 3 ) + I assuming the value of I to be constant at all the three levels....
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ED and Income determination - line OY passing from the...

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