Macroeconomics: Theory and Policy

5

The Keynesian Model of Income Determination in a Two Sector Economy

After studying this topic, you should be able to understand

• Aggregate demand is the total amount of goods demanded in an economy.
• The consumption function is a relationship between income and consumption.
• Saving is income that is not spent on consumption.
• The aggregate demand function is obtained by a vertical summation of the investment function and consumption function.
• In the Keynesian theory, there are two approaches to the determination of income and output: Aggregate Demand ‒ Aggregate Supply Approach and Saving ‒ Investment Approach.

INTRODUCTION

This is the first of the series of four chapters, which focuses on the determination of the equilibrium level of income ...