Page 1 - lesson note--Income Determination and Multiplier43

SAI INTERNATIONAL SCHOOL

ECONOMICS

Class-XII

CHAPTER 8

Income determination and multiplier

(Module- 43)

TOPICS TO BE COVERED-

-AD-AS approach

-S-I approach

Aggregate demand and Aggregate supply approach: -
According to J.M.Keynes the equilibrium level of national income, output
and employment is determined at the point where = . i.e. at point E as

per the diagram given below. Y
AS
AD<
AD
In the given diagram point E is the
>
equilibrium point, where AD =AS,

E

X
O

Case: -1 when AD ˃ As i.e. to the left-hand side of equilibrium point implies

• The three sectors of economy plan to consume more than what
the producers plan to produce.

• It leads to a fall in planned inventory below the desired level.
• In order to bring the planned inventory to the desired level, the
producers expand production, it leads to an increase in
employment, output and in turn national income

• It will continue till AS=AD.
Case: -2 when AD ˂ As i.e. to the right-hand side of equilibrium point implies