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Determination of income and employment

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DETERMINATION OF INCOME AND EMPLOYMENT Aggregate Demand. Aggregate demand refers to the money value of goods and services that all sectors of the economy are planning to buy at a given level of income, in a given period of time. It is equal to Aggregate Expenditure. COMPONENTS OF AGGREGATE DEMAND Private consumption expenditure, Investment expenditure, Government consumption expenditure and Net Exports are the components of aggregate demand. In a two sector economy aggregate demand consists of Private consumption Expenditure and Investment Expenditure. AD = C + I SCHEDULE INCOME CONSUMPTION INVESTMENT AGGREGATE DEMAND (C + i) 0 40 20 60 100 100 20 120 200 160 20 180 300 220 20 240 400 280 20 300 500 340 20 360 c+I c CONSUMPTION INVESTNMENT AD I INCOME INCOME Important features of Aggregate Demand. (i) In a two sector economy Aggregate demand is the sum of Consumption Expenditure and Investment Expenditure. AD = C + I (ii) Even at zero level of income, there is consumption of some basic goods and services. It is called autonomous consumption (C). So, there is Aggregate demand even at zero level of income. Aggregate demand curve and Consumption curve start from a point on Y axis. (iii) Aggregate Demand and the Consumption curves slopes upward from left to right because consumption increases as income increases. (iv) It is assumed that Investment is autonomous. So, Investment curve is a horizontal line parallel to X axis. Aggregate Supply Ag ...
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