Economics and National Income
Answers to End-of-Chapter Questions in Chapter 17
1. An economy is currently in equilibrium. The following figures refer to elements in its national income accounts.
| |£ billions |
|Consumption (total) |60 |
|Investment |5 |
|Government expenditure |8 |
|Imports |10 |
|Exports |7 |
(a) What is the current equilibrium level of national income? (b) What is the level of injections? (c) What is the level of withdrawals? (d) Assuming that tax revenues are £7 billion, how much is the level of saving? (e) If national income now rose to £80 billion and, as a result, the consumption of domestically produced goods rose to £58 billion, what is the mpcd? (f) What is the value of the multiplier? (g) Given an initial level of national income of £80 billion, now assume that spending on exports rises by £4 billion, spending on investment rises by £1 billion, whilst government expenditure falls by £2 billion. By how much will national income change? (h) Given this new level of national income, assume that full employment is achieved at a national income of £100. Is there an inflationary or a deflationary gap? (i) What is the size of this gap?
(a) In equilibrium, income (Y) = expenditure (E) E = C + I + G + X – M = £60bn + £5bn + £8bn + £7bn – £10bn = £70bn
(b) J = I + G + X = £5bn + £8bn + £7bn = £20bn
(c) In equilibrium, W = J. As this economy is in equilibrium, withdrawals will equal current injections. W = £20bn
(d) W = S + T + M = S + £7bn + £10bn (S = £20 – £7bn – £10bn = £3bn
(e) Cd = C – M = £50bn
1. An economy is currently in equilibrium. The following figures refer to elements in its national income accounts.
| |£ billions |
|Consumption (total) |60 |
|Investment |5 |
|Government expenditure |8 |
|Imports |10 |
|Exports |7 |
(a) What is the current equilibrium level of national income? (b) What is the level of injections? (c) What is the level of withdrawals? (d) Assuming that tax revenues are £7 billion, how much is the level of saving? (e) If national income now rose to £80 billion and, as a result, the consumption of domestically produced goods rose to £58 billion, what is the mpcd? (f) What is the value of the multiplier? (g) Given an initial level of national income of £80 billion, now assume that spending on exports rises by £4 billion, spending on investment rises by £1 billion, whilst government expenditure falls by £2 billion. By how much will national income change? (h) Given this new level of national income, assume that full employment is achieved at a national income of £100. Is there an inflationary or a deflationary gap? (i) What is the size of this gap?
(a) In equilibrium, income (Y) = expenditure (E) E = C + I + G + X – M = £60bn + £5bn + £8bn + £7bn – £10bn = £70bn
(b) J = I + G + X = £5bn + £8bn + £7bn = £20bn
(c) In equilibrium, W = J. As this economy is in equilibrium, withdrawals will equal current injections. W = £20bn
(d) W = S + T + M = S + £7bn + £10bn (S = £20 – £7bn – £10bn = £3bn
(e) Cd = C – M = £50bn