1. It includes the following areas:
Keynesian Theory of Income Determination : two-sector model using AE=AS Approach This courseware is designed for revision purposes after finishing the above topic.
It includes the following areas:
13 power point presentations
1 excel worksheet for interactive construction
10 multiple choice questions (4 options)

2. Coursework(Sec1-39-11) by s.w. Leung
Keynesian Theory of Income Determination : two-sector model using AE = AS Approach
Coursework(Sec )
by s.w. Leung

3. Assumptions in NI Models
a single concept of NI (Y)
a constant level of potential income (Yf)
existence of unemployment
constant price level i.e. Y=Q since P=1

4. Two-sector model --- Keynesian
Circular flow diagram
E(AE) : Aggregate expenditure
Y(NI) : National income
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5. Two sectors : Household & Firm
Circular flow diagram
Two sectors : Household & Firm C
National Income
Household
National Expenditure S
Financial
market
C : consumption I
S : saving
I : investment
Y : Income generated
E : Payments for goods & services Y
Firm E

6. E (AE) : Aggregate expenditure
In a two-sector economy, firms (F) produce consumption goods (C) and investment goods (I) , that means expenditure (E) in the economy is on either C or I ; and we get an income-generated function.
E = C + I

7. Y(NI) : National income
On the other hand, income (Y) received by households (H) is either consumed (C) or saved (S). To complete the flow of income and expenditure, E = Y, we get the equilibrium income (Ye).

8. A graphical approach (AE = AS) to income determination
E function and Y-line
component of AE
simple algebra of income determination
construction

9. E function and Y-line E function E(AE) : Demand side E = C + I
Y(AS) : Supply side Y E
Y-line(450)
E = Y
Construct a Y-line (450) : shows all the points where E equals Y Y
E = Y = Q (re: assumption P=1)
(E) expenditure in the economy equals (Y) income generated by producing (Q) output

10. Component of AE Consumption function : Cf Investment function : I
Cf = C + cY a function of Yd (in a two-sector model Y = Yd)
C : intercept on E-axis (amount consumed when income is zero)
c : slope of Cf (c is the marginal propensity to consume)
Investment function : I
I : an autonomous function (doesn’t vary with Y)
Aggregate expenditure function (E or AE)
E = C + I a function of Y

11. Simple algebra of income determination
Solution :
E = C + I
E = Y + 40 = Y
In equilibrium E = Y(Ye)
Y = Y
0.4Y = 120
Y = 300
and C = (300) = 260
Given : C = Y
I = 40
Find Ye

12. construction
Let’s take C = Y and I = 40 to find Ye graphically
An excel worksheet (sheet 1) will be used to illustrate.
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13. Multiple Choice Exercise MCdemo25.htm demo1.wmf
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