What traumatic event does Zitkala-Sa describe at the school?

The forcible cutting of her long hair

Why was the cutting of her hair so humiliating to Zitkala-Sa?

Among her people, shingled hair was worn by cowards and mourners

What is the consumption function?

The relation between consumption and income, \(C=\bar{C}+cY\), where \(\bar{C}\) is autonomous consumption and c is the marginal propensity to consume.

Define marginal propensity to consume and its relation to MPS.

MPC is the change in consumption per unit change in income, \(\dfrac{\Delta C}{\Delta Y}\); since income is consumed or saved, \(\text{MPC}+\text{MPS}=1\).

When is the economy in equilibrium in the Keynesian model?

When planned aggregate demand equals planned output, \(Y=AD\), or equivalently when planned saving equals planned investment.

What is the investment multiplier?

The ratio of the total change in income to the initial change in autonomous investment, equal to \(\dfrac{1}{1-c}=\dfrac{1}{\text{MPS}}\).

Why is the value of the multiplier greater than one?

Because the initial spending creates income that is partly re-spent, generating successive rounds of additional income.

Distinguish between ex-ante and ex-post.

Ex-ante refers to planned or intended values of variables; ex-post refers to actual, realised values.

Explain the paradox of thrift.

If all households try to save more, aggregate demand and income fall, so total saving may end up unchanged or lower than before.

What is deficient demand and its effect?

A situation where aggregate demand is less than the full-employment output, causing unemployment and a tendency for prices to fall.

What is excess demand and its effect?

A situation where aggregate demand exceeds full-employment output, creating inflationary pressure that tends to raise prices.

What is meant by full-employment level of income?

The level of income at which all factors of production are fully employed, which need not coincide with the equilibrium level of income.

Determination of Income and Employment

Class 12 Economics · Introductory Macroeconomics · Chapter 4

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Summary

This chapter develops the Keynesian theory of income determination, assuming a fixed price level and a given rate of interest so that output is determined by aggregate demand. Aggregate demand is the total planned (ex-ante) spending on final goods, made up of consumption, investment, government spending and net exports. Consumption depends on income through the consumption function \(C=\bar{C}+cY\), where \(\bar{C}\) is autonomous consumption and c is the marginal propensity to consume, \(\text{MPC}=c=\dfrac{\Delta C}{\Delta Y}\); the marginal propensity to save is \(\text{MPS}=1-c\). Investment is taken as autonomous. The economy is in equilibrium where planned output equals planned aggregate demand, that is where \(Y=AD\) (the 45-degree line meets the AD line), or equivalently where planned saving equals planned investment. A key result is the multiplier: an autonomous change in spending changes equilibrium income by a larger amount, since the investment multiplier is \(\dfrac{1}{1-c}=\dfrac{1}{\text{MPS}}\). The chapter also explains the paradox of thrift — when everyone tries to save more, total saving may not rise and income falls — and distinguishes full-employment equilibrium from situations of deficient demand (which causes unemployment and tends to lower prices) and excess demand (which tends to raise prices), introducing the idea of effective demand.

Key terms

Aggregate demand

Total planned expenditure on final goods: consumption, investment, government spending and net exports.

Consumption function

The relation \(C=\bar{C}+cY\) linking consumption to income.

Marginal propensity to consume

The fraction of extra income spent on consumption, \(\text{MPC}=\dfrac{\Delta C}{\Delta Y}\).

Investment multiplier

The ratio of the change in income to the change in autonomous spending, \(\dfrac{1}{1-c}\).

Paradox of thrift

The result that an attempt by all to save more may leave total saving unchanged and reduce income.

Effective demand

The level of aggregate demand that determines equilibrium output when supply is perfectly elastic.

Extra questions & answers

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In the Keynesian model the price level is assumed to be:

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