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Fundamental Psychological Law of Consumption 82 B Consumption Function 84 C Technical Attributes of the Consumption Function 88 D Factors Affecting the Consumption Function 92 E Significance of the Concept of Consumption Function 96 F. Marginal Efficiency of Capital and Rate of Interest 107 F, MEC Schedule 109 G Investment Demand Schedule no H. The Concept of Savings 140 B Determinants of Savings 142 C Saving : A Virture or a Vice ? the0 , r y* fav '«g and point of less than full employment.

Keynes’ Criticisms against the Classtcal Theory ... Keynesian Theory of Emplojmcnf 55-81 A Introduction 55 D Pnnuplcs of Effective Demand 56 C Anal) sis of the Level ol Effective Demand 57 D How GNP is determined 70 E Pa adox of Poverty and Potential Plenty 75 F Outline ot Keynesian Theory of Employment 77 G Shortcomings of Keynesian Theory 80 23 The Consumption Function 82— 1(10 A. 101-123 A Introduction 101 0 Meaning of Investment Function 102 C Marginal Efficiency of Capital 102 D Difference between Marginal Productivity and Margin »1 Elficicncy of Capital 105 E. " which invest, differs from Tl "»’ Keynes investment can be, and norma *' .

Factors Affecting MEC II 3 I Role of Expectations 114 J, Cuticism of MEC 117 K. Leakages to the Multiplier Process 130 E Shortcomings of the Multiplier Theory 1 31 F. 149 D Saving and Investment Equality 152 E Underemployment Equilibrium 157 (XV) 11 Keynes’ Theory and Underdeveloped Countries It O— 165 A Introduction 160 B Distinctive Nature and Typical Causes of Unemployment in Underdeveloped Countries 160 C The Static Feature c f the Keynesian Model 161 D Failure of the Keynesian Multiplier m Underdeveloped Countries 163 E Concluding Remarks 164 -28 Trade Cycles and Measures of Economic Stabilisation 166—196 A Introduction ... 71 ' Fixed vs Flexible Exchange Rates 73 Case for Fixed Exchange Rate System . ’ ° q Ua t0 Cach other at the Saving Investment Inequality different group™" p Vop Te^avmg i Tan a^of effectcd b £ two investment is made bv PI1 ir B n.5 an a £5, con3 ™cn, whereas different from that of investment Pennt THe mot Ive for saving is for leaving a good fortune tn °£ , e , want r ° save for old age, accumulating money, etc Investrr^ f cbl dl Jf n » for the pleasure of motivated by profit earnings S“ i, 0n the °i her fiand .

Reasons for the Unfavourable Terms of Trade of Less Developed Countries (LDCs) 48 G Effects of Tariffs on the Terms of Trade 4* H. Effects of Economic Developmeni/Growth on the Terms of Trade 51 33. Heal income refers to jjj* 1 ^'th Tg wen period Real services produced by the co nun Y ^ j re S0 urces and its income depends on the availammy employment m the economy and real income are the two sides oi In a wa, money incom * J ” f re -d income is the money in- the same coin The prices of output It may be stated come It is determined by tnc thus Y=PO 164 The Income Theory of Money Saving Exceeding Investment (SI) We have seen above the process resultjog when investment exceeds saving Alternatively, when saving exceeds investment, the process will be similar, but with a contractionary trend, which we shdll see in the present section According to Keynes, the volume of money saving will ordi narily exceed the amount of investment expenditure as a result of sudden and steep fall m the marginal efficiency of capital which is not contravened by a proportional reduction in the rate of interest This generally happens at the peak of the prosperity phase of the trade cycle While the volume of saving may remain the same, it is investment expenditure which declines on account of the collapse of the marginal efficiency of capital causing it to exceed investment An excess of money saving over investment expenditure means that the total expenditure on newly produced goods is less than income generated in their production The net result of such a situation is shrinkage in consumer’s income The demand for and prices of consumer goods fall The realised profits of the enterprises will fall short of their expected profits Consequently, they will curtail out- put employment and income When income is decreased, saving which is a function of income, will also decline This reduces the gap between saving and investment Employment and income will continue to shrink until once more, saving and investment are equated, but at a low income and a low price level In graphical terms, as in Fig 2(A), wc find that when invest- ment decreases from II to V I , income is contracted, and a new equilibrium (S = I) is established at point E', at a low income level {aa) In subsequent periods, this will remain as equilibrium Ic\ el of income, so long as S— I.

31 D The Nature of Unemployment in Under- developed Countries ... Galas from Trade and Terras of Trade 37—54 A Gams from Trade 37 B, Distribution of Gams 38 C Meaning and Types of Terms of Trade 39 D Equilibrium Terms of Trade 42 E Factors Influencing Terms of Trade 48 F. Ce ' S of ‘"vestment over saving, •he gap between ineesirrent a?

3 Inflationary price rue is persistent and u irreversible a short time , thus, it should be distinguished fro** 1 * P rise which may occur temporarily, due to short scarcity or during a cyclical upswing 4 A cyclical movement is not inflation Inflation u a ruing trend in the price level 5 Inflation is endogenous to the economic system. Q7yf * 7 c k* Served that during the two years 1973 74 and T f j 75 only, the rise in prices was to the extent of 40 per cent under the impact of the Emergency, and due to the drastic measures taken by Mrs Gandhi’s Congress Government at that time, inflation was arrested and the price index declined, by 6 4 per cent But the gams of the emergency were shortlived In 1976-77, again the monster of inflation raised its head There was, thus, a 12 per cent ^r^ Eri V; rgenc y a lo n g with inflation caused the political defeat oi Mrs uandhi and the Congress Party The Janata Government ^ et °i° CCapythe 8eat ° r P^er in Delhi It was deemed as a change, but the Janata Government ha$ been beque- t Jj j "W* mfktion from the various governments since independence During the two years of the Janata regime the general wholesale price index went up from 182 1 to 191 1, register- ing a 9 point rue From 1978 79 to 1979 80, however, the price rise was around 21 per cent.

(»») Inflation It occurs when prices rue after the itage full employment m the economy, with no corresponding employment and output The following are the main characteristics of inflation . Inflation u a long-term operating dynamic process 2 Inflation is a process of persistently rising price level. 202 Analytic of Inflation and Deflation cent By 1969-70, the general wholesale price index (WPI 1961 62= 100) stood at 172 The story of inflation in India reaches its climax during the Fourth Plan period (1969 70 to 1973 74) It experienced a compound fate of inflation of 9 per cent The general wholesale price index (WPI 3961 62=100) rose from 172 in 1969 70 to 254 m 1973 74 registering a 47 per cent increase Eventually, for a meaningful comparison, the price statistics were revised with a new base year, 1970 71 Table 2 represents the price behaviour in India during the decade of seventies and after TABLE 2 Price Trend in India 1570-71—197 9 80 (1970-71 -100 ^ ear Wholesale Price Indices Annual Price Change (All commodities) in Percentage (Rate of Inflation) 1970 71 1971 72 1972- 73 1973- 74 1974 75 1975 76 1976-77 1977 78 19Tg 79 1979 80 1980-81 1981 100 _ 108 2 82 121 5 12 2 158 0 30 0 173 9 10 0 162.6 - 64 182 1 11 9 182 7 03 191 1 45 232 0 214 270 7 167 277 1 24 287 1 36 Source Government of India Economic Survey, J982 83 !

community-, p oduct mn cajiaci ty wifl actual y ^ employed The volume of tht ^ wta P According to the affect employment and outp M, no I affect!

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