Economics and National Income

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 |