Macroeconomics: Theory and Policy

7

The Keynesian Model of Income Determination in a Three Sector Economy: Introduction of the Government Sector

After studying this topic, you should be able to understand

• Three main activities of the government are government expenditure, transfers and taxes.
• Income leakages are in the form of saving and taxes, and injections are in the form of investment and government expenditure.
• There are two approaches to income determination in a three sector model, aggregate demand—aggregate supply approach and leakages equal injections approach.
• An economy can achieve a full employment output by an expansion in its budget, financing every rupee of additional expenditure with a rupee of additional taxes.
• Introduction of Government Transfer Payments has ...