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?
What forms will these withdrawals take?
Saving, taxes, expenditure on imports
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
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.
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
Given your answer to (e), and assuming that total household incomes are currently £550bn, what will happen to household income?
What is the formula for the marginal propensity to withdraw?
What are the answers to the following? (Use a number or another term as appropriate.)
Y – W = Cd
mpcd + mpw = 1
1–mpcd = mpw
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 |
Calculate the marginal propensity to consume domestically produced goods (mpcd).
(Cd / (Y = £30bn / £40bn = ¾ or 0.75
On the diagram below, label the line shown and then plot Cd , J and aggregate expenditure (E) against national income (Y). [pic]
What will be the equilibrium level of income (where E = Y)?
What are withdrawals and injections at this level of income? W …. £20bn J
Plot the withdrawals line on the diagram.
You should now be able to see that there are two ways of finding the equilibrium level of national income.
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:
Fill in the figures in the table for total injections (J) and aggregate expenditure (E).
What is the equilibrium level of national income?
What is the mpcd?
4/5 or 0.8...
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