07-12-2012, 02:35 PM
Assumptions of Income-expenditure Model
Assumptions of Income.ppt (Size: 2.07 MB / Downloads: 26)
Assumptions of income-expenditure model (or elementary Keynesian model)
The amount of resources and the state of technology remain unchanged, i.e., Yf is a constant.
There exists an unemployment of resources. The model is to find out the determinants of equilibrium GNP and the ways to eliminate unemployment.
No indirect taxes, subsidies, depreciation or net factor income from abroad, i.e., Y = GDP = GNP.
Multiplier effect
is the ratio of the total change in equilibrium income to the initial change in autonomous expenditure (or autonomous withdrawal) that brought it about.
Deflationary Gap
Deflationary AD gap is the amount of
expenditure by which the present expenditure
falls short of the expenditure achieving
full employment.
Deflationary income gap is the amount of
income by which the equilibrium income
falls short of the full employment income.
Inflationary Gap
Inflationary AD gap is the amount of
expenditure by which the present expenditure
exceeds the expenditure achieving
full employment.
Inflationary income gap is the amount of
income by which the equilibrium income
exceeds the full employment income.