Outline the steps required to be taken in deriving saving curve from the given consumption curve. Use diagram.
In part A, CC curve shows consumption function corresponding to each level of income whereas 45o line represents the income. Each pointy on 45o line is equidistant from X axis and Y axis. C curve intersects 45o line at point B at which BR=OR i.e. consumption = income. Therefore, point B is called break-even point showing zero saving.
It emphasizes that saving curve must intersect x-axis at the same income level where consumption curve and 45o line intersect. Further, it will be seen that to the left of point B, consumption function lies above 45o line showing that consumption is more than income, i.e. negative saving and to the right of point B, consumption function lies below 45o line showing positive saving.
In part B, we derive saving function in the form of saving curve. In part A, the amount of saving is the vertical distance of Part A representing saving/ dissaving and by joining them, we derive a saving curve. For instance, at 0(Zero) level, of income in Part A, vertical distance OC is plotted as OS1 below X axis in Part B.
Similarly, At OR level of income in Part A, vertical distance at point B being nil is shown as point B1 on X axis in lower part of the figure. Likewise, LM vertical distance of part A is shown as L1M1 in part B. By joining points S, B1 and L1 in the lower segment, we get saving curve. Thus saving curve or function is diagrammatically derived from consumption curve or function.
Calculate national income and gross national disposable income from the following:
1. Net current transfers to abroad (-) 15
2. Private final consumption expenditure 600
3. Subsidies 20
4. Government final consumption expenditure 100
5. Indirect tax 120
6. Net imports 20
7. Consumption of fixed capital 35
8. Net change in stocks (-10)
9. Net factor income to abroad 5
10. Net domestic capital formation 110
Computation of National Income:
National Income = Private Final Consumption Expenditure + Government Final Consumption Expenditure - Net Imports + (Net Domestic Capital Formation + Depreciation) - Depreciation - (Indirect Taxes - Subsidies) - Factor Income to Abroad
or, National Income (NNPFC)
= 600 + 100 + (-20) + (110 + 35) - 35 - (120 - 20) -5 = Rs 685
Computation of Gross National Disposable Income:
Gross National Disposable Income = NNPFC + net Indirect Taxes + consumption of fixed capital – net current transfer to abroad
= 685 + (120-20)+ 35 –(-15)
= Rs 835
Explain national income equilibrium through aggregate demand and aggregate supply. Use diagram. Also explain the changes that take place in an economy when the economy is not in equilibrium.
Equilibrium means the state of balance or state of no change. By equilibrium of national income we refer to that level of national income which remains unchanged at a particular level. In a simple economy, there are two elements of national income consumption and investment. An economy is said to be in equilibrium when aggregate expenditure equals aggregate income or aggregate money value of all goods and services.
There are two alternative approaches of national income determination and the first approach determines equilibrium level by the equality of aggregate demand and aggregate supply of output.
Under this approach, the equilibrium level of income is determined at the point where Aggregate Demand (AD) is equal to Aggregate Supply (AS).
In the diagram, consumption curve is depicted by C and the investment curve is depicted by the horizontal straight line parallel to the output/income axis. Summing-up the investment curve and consumption curve, we get the Aggregate Demand curve represented by AD = C + I. The Aggregate Supply curve is represented by the 45Â° line. Throughout this line, the planned expenditure is equal to the planned output. The point E is the equilibrium point, where the planned level of expenditure (AD) is equal to the planned level of output (AS). Accordingly, the equilibrium level of output (income) is OQ.
In case, if AD > AS, then it implies a situation, where the total demand for goods and services is more than the total supply of the goods and services. This implies a situation of excess demand. Due to the excess demand, the producers draw down their inventory and increase production. The increase in production requires hiring more factors of production, thereby increases employment level and income. Finally, the income will rise sufficiently to equate the AD with AS, thus the equilibrium is restored back.
On the other hand, In case, if AS > AD, then it implies a situation, where the total supply of goods and services is more than the total demand for the goods and services. This implies a situation of deficit demand. Due to the deficit demand, the producers experience piling-up of stock of unsold goods, i.e. inventory accumulation. This would force the producers to cut-back the production, thereby results in the reduced employment of factors of production. This leads to fall in the income and output. Finally, the income and output will fall sufficiently to equate the AD with AS, thus the equilibrium is restored back.
Calculate investment expenditure from the following data about an economy which is in equilibrium:
National income = 1000
Marginal propensity to save = 0.25
Autonomous consumption expenditure = 200
or, Y=C+cYd+I ...
here, C is autonomous consumption expenditure=200
c is marginal propensity to consume=1-mps
As MPS is given 0.25
so, c=1 - 0.25=0.75 and
Y is income = 1000
Thus putting all the values in equation,
1000 = 200+.75*1000+I
Or I = 1000-200+750
Or I =50
Thus investment expenditure is 50.
Explain the 'lender of last resort' function of a central bank.
Lender of last resort function of Central Bank implies that the Central Bank is under the obligation to provide funds against securities to the commercial bank as and when needed by them. When a commercial bank faces a financial crisis and fails to obtain funds from other sources, then the central bank provides them with the financial assistance in the form of credit. This role of the central bank saves the commercial bank from being bankrupt. Thus, the central bank plays the role of a guarantor for the commercial banks and maintains a sound and healthy banking system in the economy.
Government raises its expenditure on producing public goods. Which economic value does it reflect? Explain.
The economic value that is reflected in the rise in the production of public goods is the 'social welfare'. The major objective of the budgetary policy of the government is to enhance the welfare of the society at large. For this, it performs the allocative function. The allocative function is concerned with allocating the resources between the private and public sectors. As the public goods cannot be provided by the private sectors through market mechanism, hence the need for providing such goods is to be fulfilled by the government. In addition to this, private goods cannot be afforded by all, that is, only those who can pay for these goods can avail the benefits of such goods. But, as the public goods are required by all and are essential from welfare point of view, thus, government provide these goods.