# Economics and National Income

Pages: 5 (874 words) Published: May 27, 2013
1.(a)If a household earns £200 a week and spends £150 each week on domestically produced goods and services, how much does it withdraw from the circular flow?

£50

(b)What forms will these withdrawals take?Saving, taxes, expenditure on imports

(c)Assume that total household incomes rise from £500bn to £550bn. Assume that this results in the consumption of domestically produced goods and services rising from £450bn to £490bn. What is the mpcd? (Cd / (Y = £40bn/£50bn = 4/5 or 0.8

(d)Assuming that the mpcd remains constant, what will the level of consumption of domestically produced goods and services be if national income now rises to £700bn?

If national income rises from £550bn to £700bn, a rise of £150bn, then Cd must rise by 4/5 of this (= £120bn) from £490bn to £610bn.

(e)If total UK consumption of domestically produced goods and services is £490bn and injections into the circular flow of income are £80bn, what will be the level of aggregate expenditure (E)? £490bn + £80bn = £570bn

(f)Given your answer to (e), and assuming that total household incomes are currently £550bn, what will happen to household income?
Rise

(g)What is the formula for the marginal propensity to withdraw?(W/(Y

(h)What are the answers to the following? (Use a number or another term as appropriate.)

(i)Y – W = Cd

(ii)mpcd + mpw = 1

(iii)1–mpcd = mpw

2.(a)Assuming that injections are constant at all levels of national income at £20 billion, complete the following table.

|Income (Y) (£bn) |40 |80 |120 |160 |200 |240 |280 | |Consumption (Cd) (£bn) |40 |70 |100 |130 |160 |190 |220 | |Injections (J) (£bn) |20 |20 | 20 | 20 | 20 | 20 | 20 | |Withdrawals (W) (£bn) | 0 |10 | 20 | 30 | 40 | 50 | 60 | |Aggregate expenditure (E) (£bn) |60 |90 |120 |150 |180 |210 |240 |

(b)Calculate the marginal propensity to consume domestically produced goods (mpcd).

(Cd / (Y = £30bn / £40bn = ¾ or 0.75
(c)On the diagram below, label the line shown and then plot Cd , J and aggregate expenditure (E) against national income (Y). [pic]
(d)What will be the equilibrium level of income (where E = Y)?£120bn

(f)What are withdrawals and injections at this level of income? W …. £20bn J £20bn
(g)Plot the withdrawals line on the diagram.See diagram.
You should now be able to see that there are two ways of finding the equilibrium level of national income.

3.In a closed economy (i.e. one that does not engage in foreign trade), spending on consumer goods is related to national income by the following schedule:

|Y (£bn) | 0 |20 |40 |60 |80 |100 |120 |140 |160 |180 | |Cd (£bn) | 4 |20 |36 |52 |68 | 84 |100 |116 |132 |148 | |J (£bn) |20 |20 |20 |20 |20 | 20 | 20 | 20 | 20 | 20 | |E (£bn) |24 |40 |56 |72 |88 |104 |120 |136 |152 |168 |

If firms are investing at a rate of £8n per year and the government is spending £12n per year:

(a)Fill in the figures in the table for total injections (J) and aggregate expenditure (E).

(b)What is the equilibrium level of national income?£120bn

(c)What is the mpcd?4/5 or 0.8...