WORKSHOP 8
Determination of National Income
and the role of Fiscal Policy
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?
......
(b)What forms will these withdrawals take?
......
(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?
......
(d)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)?
......
(e)Given your answer to (d), and assuming that total household incomes are currently £550bn, what will happen to household income?
Rise / Fall / Stay the same
Workshop
8
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 / 280Consumption (Cd) (£bn) / 40 / 70 / 100 / 130 / 160 / 190 / 220
Injections (J) (£bn)
Withdrawals (W) (£bn)
Aggregate expenditure (E) (£bn)
(b)Calculate the marginal propensity to consume domestically produced goods (mpcd).
......
(c)On the diagram below, label the line shown and then plot Cd , J and aggregate expenditure (E) against national income (Y).
(d)What will be the equilibrium level of income (where E = Y)?......
(f)What are withdrawals and injections at this level of income? W …..……. J......
(g)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.
Workshop
8
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 / 180Cd (£bn) / 15 / 30 / 45 / 60 / 75 / 90 / 105 / 120 / 135 / 150
J (£bn)
E (£bn)
If firms are investing at a rate of £10bn per year and the government is spending £15bn 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?......
(c)What is the mpcd?......
(d)What is the value of the expenditure multiplier?......
(e)Suppose that full employment yields a national income of £120bn per annum, by how much must government expenditure be changed to reach full-employment income?
......
(f)Does the initial equilibrium situation represent an inflationary or a deflationary gap, and what is the size of this gap?
......
Workshop
8
4.Examine the following diagram:
Identify the correct letters for each of the following (circle the correct answer):
(a)Equilibrium national income ...... (i) Oa (ii) Ob (iii) Od (iv) Of
(b)Injections at income Oa...... (i) aq (ii) ah (iii) hq (iv) qahq
(c)Withdrawals at income Of...... (i) tf (ii) nt (iii) mt (iv) mn
(d)mpcd...... (i) ur/su (ii) su/ur (iii) mt/tl (iv) tr/tv
(e)The amount that withdrawals rise when national income rises from Od to Of
(i) tn (ii) nm (iii) tm (iv) ln (v) lm
(f)mpw...... (i) tn/df (ii) nm/df (iii) df/tn (iv) df/nm
(g)The multiplier...... (i) tn/df (ii) nm/df (iii) df/tn (iv) df/nm
1