First Fiscal Model and Equilibrium Level of Income/Output The model assumes that government taxes (T) are autonomous, that is independent of the income level. Government follows a lump sum tax policy which means individuals and firms should pay a fixed amount of tax regardless of their level of income. The autonomous tax component is represented … Read more

Monetary policy adopted by the government affects the LM curve, whereas, the fiscal policy affects the IS curve. Expansionary monetary policy shifts the LM curve to the right, lowers interest rates and stimulates aggregate output. Contractionary monetary policy has an inverse effect on the curve. On the other hand, Fiscal policy causes a shift in … Read more

IS and LM curve helps to determine the rate of interest and equilibrium level of income through the equilibrium of money market and goods market. In an open economy, the increase in income level leads to imports of foreign goods rather than spending on domestic products. So, the IS curve in an open economy is … Read more

Meaning of Deflation Deflation is defined as a decline in the general price level of commodities and services within a given economy. Deflation occurs when demand for commodities decrease or supply of commodities increase. Lower demand or higher supply forces businesses to reduce prices. This leads to a negative rate of inflation. Thus, deflation is … Read more

Meaning The consumption function or propensity to consume is a mathematical formula introduced by John Maynard Keynes, the father of modern day macroeconomic theory. The formula shows the relationship between real disposable income and total consumption. The consumption function shows the willingness of consumers to expend on consumer goods and services at different levels of … Read more

Concept of Demand Demand refers to the quantity of a commodity or a service that people are willing to buy at a certain price during a certain time interval. It can be termed as a desire with the ‘willingness’ and ‘ability’ to pay for a commodity. An increase in the price of the commodity decrease … Read more

The circular flow model in the two-sector economy is a hypothetical concept which states that there are only two sectors in the economy, household sector and business sector (business firms). The household sector is the source of factors of production who earn by providing factor services to the business sector. The business sector refers to … Read more

Concept The circular flow of income or the circular flow model is a simple economic model that shows the circulation of money between producers and consumers within an economy. It refers to the flow of goods and services among the various sectors of the economy, balanced by the flow of monetary payments made in exchange … Read more

In the circular flow model three sector economy, government intervention has also been accounted for, although it is still assumed to be a closed economy where the income flow is not influenced by any foreign sector. Besides the income and expenditure of the households and business firms, government purchases or expenditures and taxation also come … Read more

The circular flow model in four sector economy provides a realistic picture of the circular flow in an economy. Four sector model studies the circular flow in an open economy which comprises of the household sector, business sector, government sector, and foreign sector. The foreign sector has an important role in the economy. When the … Read more