CBSE Class 12 Macro Economics Revision Notes Chapter 4

Introduction to Class 12 Macroeconomics Chapter 4 Notes

NCERT Solutions for Class 12 Economics Chapter 4 is about the Determination of Income and Employment topic. The chapter provides a wide range of examples which makes it easier for the students to comprehend and learn the concepts therein. 

The chapter discusses full employment as an economic scenario in which all obtainable labor resources are being used to their full potential. Structural unemployment is when part-time employees are unable to find jobs that are appropriate for their skill level, an economy with full employment may experience unemployment or underemployment. Full employment is attributed to the most skilled and unskilled wage earner that may be occupied at any one moment in a particular economy.

Extramarks academic subject matter experts have collected the best resources available for Economics subjects and prepared NCERT solutions for class 11 and 12 students. You can visit Extramarks’ website to access Class 12 Macroeconomics Chapter 4 Notes. The NCERT Class 12 Macroeconomics Chapter 4 Notes would help students get acquainted with the Determination of Income and Employment chapter.   Commerce students in Classes 11 and  12 will benefit from building a solid foundational understanding of macro and microeconomics for their future career prospects. 

Extramarks is one of the leading websites that offer the best quality study solutions prepared by experienced faculty who strictly follow the NCERT books and the latest CBSE guidelines. Our Economics subject matter experts have prepared NCERT solutions for Classes 9 to 12.  Specifically for Class 12 Macroeconomics Chapter 4, students can go through the article below to get an insight on  Class 12 Macroeconomics Chapter 4 Notes.

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Key Topics Covered in Class 12 Macroeconomics Chapter 4 Notes

Aggregate Demand or AD 

The aggregate demand is a model that exhibits what decides the total demand for the economy and how total demand interacts at the macroeconomic level. 

• It indicates the total price of all final goods and services planned to be bought by all divisions of the economy at a given level of income over a given time. 
• AD denotes the total expenses on goods and services in an economy during a certain period.
• It is generally presumed that increases in credit stimulate aggregate demand.
• Aggregate demand is made up of consumer goods, capital goods, government spending, imports, and exports. The factors that can affect aggregate demand interest rates are variations in inflation expectations, changes in exchange currency rates, and variances in income wealth.
• Aggregate demand can be extracted by summing corporate spending, consumer spending, government spending, private investments, and net exports. 
•  In the course of time, this aggregate demand equals the GDP or gross domestic product in the market. Even though GDP and aggregate demand increase and decrease at the same time, aggregate demand only drops at par with the GDP in the long run after adapting to the price level. All the same, other variations can also occur based on the elements and methods used. 

Extramarks Class 12 Macroeconomics Chapter 4 Notes cover this topic more extensively. So students can register on Extramarks to access these notes.

Elements of Aggregate Demand in an Open Economy:

• Consumption expenditure by households (C).
• Investment expenditure (I).
• Government consumption expenditure (G).
• Net exports (X – M).

Therefore, 

AD = C + I + G + (X – M)

Components of Aggregate Demand in Closed Economy:

• In a three-sector economy, Aggregate demand = Consumption expenditure by households or C + Investment expenditure or I + Government consumption expenditure or G.

           The three-sector economy, AD = C + I + G

• A Two-sector economy, Aggregate demand = Consumption expenditure by households or C + Investment expenditure or I 

A Two-sector economy; AD = C + I 

Ex-ante aggregate demand: 

• The term ex-ante refers to what has at present been calculated. 
• Hence, it is planned aggregate demand.

Ex-post aggregate demand: 

• Ex-post aggregate demand consists of actual consumer spending and business capital investment. 
• Specifically, the ex-post describes what actually happened.

 Aggregate Supply (AS): 

The aggregate supply model is a model that reveals what shapes the total supply of demand for the economy and how total supply interacts at the macroeconomic level. Aggregate supply is the gross quantity of output firms will produce and sell—specifically, the real GDP.

• It is the monetary price of all final goods and services bought by an economy during a period. 
• It mentions the movement of goods and services in the economy. 
• The aggregate supply represents the nation’s national income. AS=Y (National Income)
• AS is nothing greater than national income because the monetary value of final goods and services equals net value-added.
• When supply is regular amid an increase in demand, consumers pay lofty prices for goods. This forces manufacturers to increase output resulting in increased supply, which then normalizes the prices and output. 

• Industrial innovations, changes in the quality and size of labor, an increase in production costs, an increase in wages, changes in subsidies, taxes, and inflation causes changes in aggregate supply.
• In aggregate supply, a hike in demand leads to an increase in the use of current materials in the manufacturing process in the short term. However, aggregate supply is not damaged by price levels in the long term. It is only driven by competence and improvements in productivity. 

Aggregate supply = Consumption expenditure by households  + Supply   

          AS=C+S

The aggregate demand and supply concepts are comprehensively covered with illustrations and real-life examples in Extramarks Class 12 Macroeconomics Chapter 4 Notes. Students can register on our website to get detailed information.

Consumption Function:

Consumption is a movement in which institutional units consume goods or services; consumption can be either intermediate or final. It is the utilization of goods and services for the satisfaction of individual or collective human wants or needs. 

• Household income is the essential determiner of consumption demand. 
• consumption function represents the relationship between consumption and income. 
• The most fundamental consumption function assumes that consumption changes at the same rate as income. 
• Consumption function in economics is determined by the relationship between consumer spending and the various factors fixing it. At the household or family level, these factors may consist of expectations about the level and riskiness of future income or wealth, income, wealth, education, interest rates, age, and family size.
• The consumption function is an economic mechanism that directly connects total consumption and gross national income. The function introduced by British economist John Maynard Keynes states the association between income and expenditure and the proportion of income spent on goods.
• Keynes considered its two technical attributes in dealing with the consumption function or the propensity to consume, both having substantial economic significance: 

(i) the propensity to consume.

(ii) the marginal propensity to consume.

Equation of Consumption Function

C=C¯+cY

C = Consumption

C¯ = Autonomous consumption

cY= Induced consumption 

Y= Income

Autonomous Consumption: 

Autonomous consumption is the minimum consumption expense that an individual invites irrespective of income. It is the consumption of basic goods that are essential for living. For example, food, clothes, and medicines.

• Autonomous consumption specifies consumption that is not affected by income. 
•  It takes place even when income is zero and it is independent of income.
• Autonomous consumption is interpreted as the expenditures that buyers must make even when they have no disposable income. Certain goods need to be bought, regardless of how much money or income a consumer has in their possession at any given time.
•  when you might have to borrow money to purchase food is an example of autonomous consumption. 

Induced Consumption: 

Induced consumption refers to that consumption that happens on the basis of a change in income. It changes when there is some change in the level of income in the economy.

• The induced component of consumption, or cY, denotes consumption based on earnings or income.
•  It is dependent on income.
• Induced consumption is the part of consumption that differs from disposable income. When a change in disposable income induces a change in consumption of commodities and services, then that changed consumption is called induced consumption.
• Examples are new house purchases, new car purchases, vacation travel,  recreational vehicles, dining out, and other entertainment. Conversely, if national income drops or remains stagnant, consumers become more careful in their spending, and consumption expenditures fall.

Consumption function and related topics on autonomous and induced consumption are new and complex topics, they may require assistance to get the hang of it and we suggest students refer to Extramarks Class 12 Macroeconomics Chapter 4 Notes they will get detailed and authentic solutions without having to look anywhere else. These solutions are useful for both the teachers and the students, and they can be accessed anywhere without much hassle 

Propensity to Consume

Propensity to consume is of two types:

1. Average Propensity to Consume or APC: 

• It applies to consumption per unit of income. 
• It is referred to as CY.

Key Points:  

• APC>1: before the break-even point, if consumption exceeds national income, APC is greater than one. APC > 1.
• APC=1: At the break-even point when consumption equals national income, APC is equal to 1. APC=1.
• APC<1: APC is less than one when consumption exceeds national income after the break-even point 
• Inverse Relation with Income:
•  Income and APC are inversely related because APC decreases as income increases.
• APC can never be zero: autonomous consumption exists even at a zero level of national income, so APC can never be zero.

1. Marginal Propensity to Consume or MPC: 

• It is the switch in income per unit change in consumption. 
• It is defined by c and equals C and Y, where C is the change in consumption and Y is the change in income.
• Marginal Propensity to Consume or MPC = change in consumption or C and change in income or Y.

Key Points:  

• MPC=1: 
• If all the additional income is consumed, then C or the change in consumption = Y or the change in income, resulting in MPC= 1.
• MPC = 0: If the entire additional income is saved, the change in consumption or C=0 , and MPC= 0.
• Constant MPC: MPC remains constant in the short run as it is the slope of the consumption curve.
• APC value > MPC.

Saving Function: 

The saving function is the functional relationship between saving and national income. Saving is a course of setting aside a portion of current income for future use or the flow of resources accumulated in this way over a duration of time. Saving may take the form of purchases of securities, increases in bank deposits, or increased cash holdings.

• The savings function applies to the standard equation of savings which defines the correlation between savings and income, where savings value can be derived at each level with the use of income value.
• The propensity to save or saving function expresses the interrelation between saving and the level of income. It is simply the longing of the households to hoard a part of their total disposable income. Symbolically, the functional link between saving and income can be defined as S= f(Y).
• The saving function is the counterpart or matching part of the consumption function. The proportion of saving at any level of income is equal to the dissimilarity between income and consumption expenditure.

Equation of saving function

S = f (y)

Where, 

S = Saving

Y = National Income

f = Functional relationship.

Similar to Consumption Function, students can refer to Class 12 Macroeconomics Chapter 4 Notes to  get a detailed  understanding of  the concepts of Saving Function.

Propensity to Save

Propensity to Save is of two types:

1. Average Propensity to Save or APS: 

• It indicates the savings per unit of income. 
• It is denoted as SY

Key Points:  

• APS, not in the least, can be one or more than one as savings can never be equal to or greater than income. 
• At the break-even, when C= Y,  APS can be zero, as here S= 0. This is because there are no savings when an individual consumes equal to what they earn.
• APS can be negative when consumption beats income at income levels lower than the break-even point.
• APS and income are directly related. With an increase in income, APS increases. . 

1. Marginal Propensity to Save or MPS: 

• It is the swap in savings per unit of income change. 
• It is denoted by s and equals 1-c. This is because 1 is complete, and if we consume less, we can have savings.
• It follows that the total savings and consumption are equal to one. S + C = 1
• That is MPS or Marginal Propensity to Save =  Saving or S and Y or National Income. 

Key Points:  

• MPS have a range from 0 to 1.
• MPS is the slope of the saving curve.
• In the short run, MPS remains constant. 

Relation between  Average Propensity to Consume (APC) and  Average Propensity to Save (APS):

The product of APS and APC equals one. 

It can be demonstrated as follows: 

APS + APC = 1.

C + S = Y 

Dividing both sides by Y, we get

CY+SY = YY

That is, 

1= APC + APS

As, APC=CY,APS=SY

Therefore, 

APC + APS = 1

Relation between  Marginal Propensity to Consume (MPC) and  Marginal Propensity to Save (MPS) :

We know MPC + MPS = 1 (since an increase in one unit of income will be either consumed or saved).

Also, 

C +S = Y

Hence,

 Change in income(Y) = Change in consumption(C) +  Change in savings(S). Y=C+S 

The topics of APS, MPC and relations are covered at a greater length in Class 12 Macroeconomics Chapter 4 Notes. Extramarks  Economics subject matter experts have prepared these notes based on the NCERT textbooks and CBSE curriculum. 

Investment: 

An investment is an asset or resource acquired with the intention of earning income or increasing in value. An increment in the value of an asset over time is known as appreciation. The topic determination of income and employment mentions that investment is a requisite component of the two-sector model. Investment is seen as an inclusion to the stock of physical capital and changes in the inventory of a manufacturer.

• Full Employment Level of income indicates that level of income where all production factors are fully employed in the production process.
• The investment multiplier defines the relation between the increase in investment leading to an increase in national income.
• The equilibrium level of output may be plus-minus than the full employment level of output. 
• If the equilibrium level of production is more than the full employment level, demand in the economy is more than the level of output produced at the maximum employment level. 
• If it is fewer than the full employment of output, it is due to demand not being enough to engage all production factors. This condition is called the situation of deficient demand.
• This state is called the situation of excess demand. 

Two Heads of Investment:

Induced Investment:

 It is interpreted as an investment that is established on profit expectations and is directly influenced by income level.

Autonomous Investment:

 It is described as an investment that is not concerned by changes in income and is not influenced only by a profit objective.

Ex-ante Investment: 

Ex-ante investment applies to the investment made by enterprises in the economy during a particular period. The planning is done with prospective expectations in mind. 

Ex-post Investment: 

This indicates the outcome of an actual investment. The authentic investment made by all entrepreneurs in the economy during a given period. 

The contrast between ex-ante investment and ex post-investment

Investment is an interesting topic and is extensively used in Economics and many other finance subjects. Students should register on the Extramarks website to get access to Class 12 Macroeconomics Chapter 4 Notes.

Equilibrium Level of Income 

• The equilibrium level of income is only decided when AD = AS or S = I. when the movement of goods and services in the economy equals the demand for goods and services. 
• This movement of goods and services cannot always be at full employment and sometimes less than full employment.

Short Run Equilibrium Output: 

The quantity of actual GDP that will exist when AD intersects short-run aggregate supply in a short-run macroeconomic equilibrium is the amount of aggregate output produced.

Assumptions: 

Closed Economy: 

In the structure of a two-sector model that is households and firms, the determination of equilibrium output will be investigated. It suggests that there is no government or international sector. 

Self-contained Investment: 

It is assumed that investments are unaffected by income levels. To be specific, investment expenditure is self-contained.

Short-period analysis: 

This analysis is associated with a short period only.

AD-AS APPROACH: 

The production level where aggregate demand equals aggregate supply in an economy. That is AD = AS. 

It refers to whatever the producers intended to produce during the year is exactly equal to what the buyers intended to buy in that year.

Here,

AD = I + C (for a two-sector economy), and

AS = C + S

That is,

AD = Aggregate Demand, 

AS = Aggregate Supply,

C = Consumption, 

I = Investment, 

S = Saving

Two different Situations: 

 Aggregate demand > Aggregate supply or AD>AS:

In this case, aggregate demand overtakes aggregate supply, and a situation of unsatisfiable demand persists. To curb this situation, the producers will intensify the level of output and production. Aggregate supply could increase and become equal to aggregate demand, and the condition of equilibrium is restored. 

 Additional demand < Additional supply or AD<AS:

In this case, aggregate demand is lower than the aggregate supply, and a situation of redundant stocks persists. To curb this situation, the producers will lower output and production. Additional supply would decrease and become equal to additional demand, and the status of equilibrium would be restored. 

Savings-Investment Approach:

The level of national income is decided by the equality of planned savings and planned investment that can be derived from the equilibrium condition. The level of income is equal to effective demand. 

Two Situations: 

 Savings > Investment or S>I: 

Some of the forecasted output remains unsold, forcing companies to keep redundant items on hand. Consecutively, producers will cut production to clear the stocks, resulting in a reduction in production. Subsequently, the economy’s income decreases. Less income means fewer savings, and this cycle will continue until saving equals investment.

Savings > investment or S<I:

 Individuals spend more money than is necessary to purchase the anticipated output when S > I. This means that AD or additional demand outnumbers AS or additional supply in the economy. Correspondingly, producers will increase production to compensate for the situation. As a result, investment surges to the point where it equals investment.

Equilibrium

Economic equilibrium is a condition in which monetary forces are balanced. As a result, economic variables remain unchanged from their equilibrium values in the absence of external influences.

• In economics, equilibrium is an economic state of affairs whereby there exists a balance between economic forces such as demand and supply. With the absence of external forces, the values of these economic variables do not change.
• Equilibrium is important to create both a balanced market and a successful market. If a market is at its equilibrium price and quantity, then it has no objection to moving away from that point because it’s balancing the quantity supplied and the quantity demanded.
• There are three types of equilibrium in economics, namely stable, neutral and unstable equilibrium.

So, equilibrium is reached when: 

 Additional demand = Additional Supply:

AD=AS 

We already know that AD or additional demand is the sum of Consumption (C) and Investment (I):

AD = C + I

 Additional Supply(AS) is the sum of consumption (C) and saving (S):

AS = C + S

It’s crucial to remember that AD, AS, Savings, and Investment are all ex-ante variables.

For students, equilibrium-related theoretical knowledge may not be that easy to understand by going through this topic just once. It is advisable to revisit this topic, and solve sample question papers, MCQs, questions & Answers to gain a better working knowledge of equilibrium and its applications. Refer to Class 12 Macroeconomics Chapter 4 Notes available on the Extramarks website to prepare for this topic comprehensively.

Types of Employment

Full employment: 

Full employment embodies the highest amount of skilled and unskilled labour that can be employed within an economy at any given time. This happens when all those who are able and willing to work at the prevailing wage rate are given a chance.

Voluntary unemployment: 

This appears when a person can work but is reluctant to work at the prevailing wage rate.

Involuntary unemployment: 

This takes place when a worker is able and willing to work at the prevailing wage rate but cannot find work.

Underemployment: 

It arises when all those who can work at current wage rates cannot find work. It indicates the economic situation in which AS= AD or S = I, but there is inadequate labor force usage.

There is a full section dedicated to Employment in Class 12 Macroeconomics Chapter 4 Notes prepared by the Extramarks academics subject matter experts.

Multiplier Mechanism: 

• The multiplier demonstrates how the eventual change in income will result from a change in investment. The changes in investment steer to changes in income. 
• The aggregate demand rises when autonomous measures (A) rise.
• Respectively, output and income will rise in the next round, initiating consumption and the additional demand to increase. This is called the multiplier mechanism.

Investment Multiplier: 

As rooted in the economic theories of John Maynard Keynes. The term investment multiplier indicates that any rise in public or private investment spending has a more than proportionate constructive impact on aggregate income and the general economy.         

The Multiplier theory is represented with some examples in our Class 12 Macroeconomics Chapter 4 Notes. 

Excess Demand: 

It happens when aggregate demand exceeds aggregate supply and springs in total employment.

 Reasons for excess demand:

• Increase in household consumption demand due to increased propensity to consume.
• Higher public (government) expenditure by borrowing (deficit financing)and reduction in taxes..
• The rise in private investment demand on account of higher provision and attainability of credit facilities.
• The rise in demand for exports and fall in imports.
• Rise in disposable income.
• The rise in the supply of money 

Impact of Excess demand on: 

General Price Level: 

There is a state of inflation in the economy as the general price level increases when aggregate demand surpasses aggregate supply at a full-employment level. 

Output: 

As the economy is already at the full employment level, it has no impact on output, so no idle capacity exists. Hence, one cannot elevate the outcome more than already or the output can’t increase.

Employment:  

The economy is at present working at full employment equilibrium.No impact on employment level. 

Deficient Demand: 

When AD or additional demand falls short of AS or additional supply at full employment, it comes about. To express differently, AD < AS is at full employment. It’s attributed to low demand.

Reasons for Deficient demand:

• Reduced public (government) expenditure.
• Drop-in household consumption demand due to decreased propensity to consume.
•  Decrease in investment demand because of lesser provision and availability of credit facilities.
• Fall in disposable income, supply of money, and demand for exports.

Impact of Deficient demand on: 

General Price Level: 

There is a plight of deflation in the economy. The general price level drops when aggregate demand is less than aggregate supply at a full-employment level.

Output:  

Low output levels owing to unemployment and reduced investment.

Employment:  

As there will be an instance of involuntary unemployment, which leads to low employment levels. 

Learn more about excess demand and deficient demand with examples from the Indian economy from Class 12 Macroeconomics Chapter 4 Notes.

Inflationary Gap: 

• The inflation gap is the disparity between actual aggregate demand and the level of aggregate demand required to achieve full employment.
• It evaluates the magnitude of excess demand.
• As the output cannot be raised beyond the full employment level, prices will increase, and there will be a condition of inflation in the economy.

Deflationary Gap: 

• This is the difference between the actual aggregate demand and the level of aggregate demand needed to achieve full employment. 
• It estimates the degree of low demand.

System to Control Excess Demand or Deficient Demand:

• Fiscal Policy: 

Fiscal policy attributes to the general government’s expenditure and income policies to achieve its objectives. It contains:

• Change in taxation: 

Taxation is used to describe revenue policy. 

• Excess Demand: 

During an inflationary period, the government lifts taxes, resulting in a loss in people’s purchasing power. This is because the economy’s liquidity must be reduced to limit excess demand. 

• Deficient Demand: 

In case of inadequate demand, tax rates. 

1. Change in public expense: 

The government must invest heavily in publicly funded construction projects like buildings, roads, and irrigation systems. 

• Excess Demand:

During an inflationary period, the government should lower its expenditure on public works such as buildings, roads, and irrigation projects, accordingly reducing people’s money income and consumer requirements.

• Deficient Demand: 

During deficient demand, the government should increase expenditure on public funding on works such as buildings, roads, and irrigation projects, consequently increasing people’s money income and consumer requirements.

1. A Shift in public borrowing: 

• Excess Demand: 

This measure mentions that the government should borrow money from the citizens, which diminishes people’s purchasing power by leaving them with less money. Therefore, during periods of high demand, the government should increase public borrowing.

• Deficient Demand: 

This measure implies that the government should cut down the borrowings from the community, which would increase people’s purchasing power. Proportionately., during periods of low demand, the government should use reduced public borrowing.

2. Monetary Policy: 

Monetary policy of a country’s central bank to control the amount of money in movement and the availability of credit in the economy.

1. Quantitative measures: 

These are the monetary policy instruments that impact the overall supply of money or credit in the economy. These measures do not direct or restrict the credit stream to specific sectors of the economy.

You can learn more about the quantitative measures below. However, for more in-depth analysis and further clarification, we advise students to refer to Class 12 Macroeconomics Chapter 4 Notes prepared by the Extramarks subject matter experts.

Bank Rate: 

The bank price is the interest rate at which a central bank grants money to commercial banks with no security. 

• Excess Demand:

Excess demand should escalate bank rates in situations of excess demand; on account of this, the quantity of money accessible to banks decreases, and the commercial bank’s capacity to provide credit also falls. Thus the aggregate demand falls with a low credit creation and supply of money in the economy.

• Deficient Demand: 

Bank rates should be lessened in situations of deficient demand. As a result of this, the quantity of money accessible to banks increases, and the commercial bank’s capacity to lend credit also rises. Therefore the aggregate demand increases due to high credit creation and supply of money in the economy.

Open Market Operations or OMO: 

It includes the central bank purchasing and selling government assets and bonds on the open market.

• Excess Demand: 

In surplus demand, the central bank should sell the government assets and bonds in the open market. This decreases the ability of commercial banks to give loans, Hence reducing the levels of aggregate demand.

• Deficient Demand:

 In deficient demand, the central bank should purchase government assets and bonds in the open market. This escalates the ability of commercial banks to provide loans, hence increasing the levels of aggregate demand due to greater purchasing power in the hands of people.

1. Qualitative measures: 

A i). Marginal requirement: 

Commercial banks increase loans to businesses and dealers in exchange for the security of their merchandise. The bank will at no time grant credit equivalent to the overall amount of the security. It is never worth higher than the security. 

• Excess Demand: 

In conditions of excess demand, the margin requirements are raised, as it impedes the borrowers because more margin required means less amount of loan provided to them.

• Deficient Demand:

In place of deficient demand, the margin requirements are lowered so as to encourage the borrowers to take loans, as a lower margin required means more amount of loans given to them.

• Credit rationing: 

The central bank can use this method to direct commercial banks not to lend for particular intentions or to lend more for specific objectives or priority sectors. 

• Moral suasion: 

Moral suasion indicates the central bank’s persuasion, informal suggestion, request, advice, and appeal to commercial banks to coordinate with the central bank’s overall monetary policy. 

• Excess Demand: 

In an instance of excess demand, the central bank requests for the contraction of credit.

• Deficient Demand: 

On the occasion of deficient demand, the central bank requests for an extension of credit.

The Multiplier Mechanism

The production of goods employs a lot of factors such as capital, land, labor, and entrepreneurship. In the absence of any subsidies or indirect taxes, the total value of all the final goods output is distributed among various factors of production such as interest on capital, rent of the land, wages to labor, etc. Whatever is left after the distribution is the profit that stays with the entrepreneur. Thus the total sum of aggregate factor payments in the economy (National Income) equals the aggregate value of the total output of the final goods (GDP). 

Let’s take an example, say the value of the extra output, 10, is distributed among various factors as factor payments and hence the income of the economy goes up by 10. When income increases by 10, the consumption expenditure goes up by (0.8)10, as the people spend 0.8 (= Mpc) fraction of their additional income on consumption. Therefore, in the next round, the aggregate demand in the economy increases by (0.8)10 and then again it emerges an excess demand which is equal to (0.8)10. So, in the next production cycle, the producers will increase their planned output further by (0.8)10 to restore equilibrium. When this additional output is distributed among factors, the income of the economy goes up by (0.8)10, and overall consumer demand increases further by (0.8)*(0.8)*10, once again creating an excess demand of the same amount. This cycle goes on, again and again, in circular mode, with producers increasing their output to clear the excess demand in each round and consumers spending a part of their additional income from this extra production on consumption items – thereby further creating excess demand in the next round.

We have registered the changes in the values of aggregate demand and output at each round in the table given below.

Source: NCERT Textbook

The last column of output/income measures the increments in the value of the output of the final goods (which is the income of the economy) at each round. The second column measures the increase in total consumption expenditure in the economy and the third column measures the increments in the value of aggregate demand in a similar fashion. In order to arrive at the total increase in output of the final goods, we should add up the infinite geometric series in the last column, i.e.

The increment in the equilibrium value of total output thus exceeds the initial increment in autonomous expenditure. The ratio of the total increment in the equilibrium value of final goods output to the initial increment in autonomous expenditure is called the investment multiplier of the economy. 

Recalling that 10 and 0.8 represent the values of ∆ I = ∆ A and mpc, respectively, the expression

for the multiplier can be explained as

where ∆Y is the total increment in final goods output and c Mpc = . Observe that the size of the multiplier depends on the value of c . As c becomes larger the multiplier increases.

The Paradox of Thrift: 

It is determined as a state in which the public tends to save more money, and this increased saving leads to reduced consumption, succeeding in a decrease in aggregate consumption. This savings system lowers employment levels, lessens total economic savings, and slows economic growth. 

• The thrift or paradox is an economic theory that argues that personal savings can be detrimental to entire economic growth. It is based on a circular movement of the economy in which current spending steers future spending. It calls for curtailed interest rates to amplify spending levels during an economic recession.
•  It refers to a situation in which humans tend to save more money, leading to a fall in the savings of the economy as a whole. In other words, when everyone increases his or her saving-income proportion then, the aggregate demand will fall as consumption decreases.
• Paradox Definition in economics is the scene where the variables fail to follow the generally laid essence and assumptions of the theory and behave in an opposite fashion.
• This is a justification for greater government borrowing during a period of higher private sector savings. Government spending offsets the plunge in private sector spending. 
•  According to this theory, the increased savings in the short run can reduce savings, or rather the power to save, in the long term. The Paradox of Thrift comes to light out of the Keynesian notion of an aggregate demand-driven economy. A benefit in the rate of saving reduces consumption.

This concludes the overall chapter notes summary for Class 12 Macroeconomics Chapter 4. To get more comprehensive resources, we suggest students register on the Extramarks website and gain full access to our Class 12 Macroeconomics Chapter 4 Notes.

Class 12 Macroeconomics Chapter 4 Notes: Exercises and  Solutions

The Extramarks website provides Class 12 Macroeconomics Chapter 4 Notes as per the latest NCERT syllabus guidelines. Students can access the notes by clicking on the links to Macroeconomics Chapter 4 Class 12 Notes given below to prepare for the board examinations. Our academic subject matter experts  have given illustrations, examples from day-to-day life, and real-life scenarios to make the study more engaging and easy to comprehend. 

Students can revise all the significant aspects of Chapter 4 to perform well in the examination from the revision notes section of Class 12 Macroeconomics Chapter 4 Notes. Along with their own notes, students are advised to refer to Extramarks Class 12 Macroeconomics Chapter 4 Notes before the exam as they are concise, to the point and less time-consuming.

Click on the below links to access Class 12 Macroeconomics Chapter 4 related questions and answers. :

• Very Short Answer Type Questions and Solutions- 5 Questions
• Short Answer Type Questions and Solutions- 7 Questions
• Long Answer Type Questions and Solutions- 6 Questions

Benefits of Class 12 Macroeconomics Chapter 4 Notes

The Extramarks innovative tools and modern teaching methods make learning easy and engaging for students to enjoy it. Extramarks have made learning effective and personalized via its website and mobile app tools. Students can truly enjoy the customized experience while learning Class 12 Macroeconomics Chapter 4 Notes. If you are looking for elaborate study material for Economics, access the Extramarks content on Class 12 Macroeconomics Chapter 4 Notes.

Extramarks aid students to step up their learning experiences and enjoy  the following benefits: 

• Students become more confident during their examination because notes have all the solutions to your problems provided by Extramarks.
• It helps students to tackle challenging questions with ease and there are fewer chances of making silly errors. 
• The answers are accurate and to the point. 
• It saves valuable time during tests and exams. 
• Exam stress and anxiety are reduced by revising them often and clarifying your doubts with these detailed notes.
• It facilitates and encourages students to enhance their studies and improve their scores.