ED₁ = Y₁ = G₁ + by₁

ED₂ = Y₂ = G₂ + by₂

ED₃ = Y₃ = G₃ + by₃

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 G₁ ED₁, G₂ ED₂ and G₃ ED₃ are three different levels of effective demand. The distances G₁, G₂ and G₃ along the vertical axis show autonomous investment expenditure of the public authority at respective levels of the effective demand. The line OY passing from the origin is a 45⁰ 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 e₁, e₂ and e₃ between the three effective demand curves and the OY straight line are equilibrium positions. At points e₁, e₂ and e₃ the levels of income generated are Y₁, Y₂ 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 ED₁, ED₂ and ED₃ would have then been shifted a little upwards. With their inclusion we can write the three ED equations as follows :

Y₁ = G₁ + b (Y₁) + I

Y₂ = G₂ + b (Y₂) + I

Y₃ = G₃ + b (Y₃) + I

assuming the value of I to be constant at all the three levels.

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Index

5. 1 Classical Theory
5. 2 Keynes' Employment Theory

Chapter 6