After
discussing about consumption and investment function in my previous posts, we
are now in a position to study and analyse the equilibrium level of income and
output.
Basic Assumptions:
1)
Short Period analysis – Keynesian theory of equilibrium output is determined
only with reference to short period of time.Short run is defined as a period of
time during which level of output is determined exclusively by the level of
employement in the economy. Technology is assumed to remain constant.
2)
Closed economy – Keyenes discuss the theory of equilibrium GDP in the context
of a closed economy.This is an economy which has no relations with the rest of the world,there is no import or
export.
Its
two sector economy consisting of the household sector and business sector.All
the decisions concering consumption expenditure is taken by the individiula
household, while the business firms take decisions regarding investment.
