Page 2 - lesson note-Aggregate Demand and Related Concepts 41

Relationship between MPC and MPS:

The aggregate supply function is given as:

= +

=> ∆ = ∆ + ∆

∆ ∆ +∆
=> =
∆ ∆
∆ ∆
=> 1 = +
∆ ∆
=> 1 = +

OR

=> 1 − =

OR

=> 1 − =
• There always exists an inverse relationship between MPC and MPS.
• When MPC = 1, then MPS is at its minimum i.e. 0.
• When MPC = 0, then MPS is t its maximum i.e. 1.

Determinants of Induced Investment:
• Marginal efficiency of Investment: -

It refers to expected rate of return from an additional investment. It is
influenced by two factors

1. Supply price. 2. Prospective yield.

• Rate of interest: -

It refers to cost of borrowing money for financing investment.

Ex-ante savings and Ex-ante investment: -

Ex-ante saving refers to aunt of saving which households plans to save at
different levels of income in the economy.

Ex-ante investment refers to amount of investment which firms
plans to invest at different levels of income in the economy.

Ex-post savings and Ex-post investment: -

Ex-post savings refers to the actual savings or realized saving in an
economy during a year.