Question

Be sure you ANSWER ALL PARTS OF EACH QUESTION.

INSERT YOUR ANSWERS UNDER EACH QUESTION – FIVE LINES MAXIMUM

1. Identify two (2) examples of “leakages” that might exist in an economy. Also, explain why Keynes would have referred to them in this way.

2. A hypothetical economy is simultaneously experiencing an average propensity to consume of .90 and a marginal propensity to consume of .80. Explain in detail what this means. Be specific.

3. Who or what is the active participant in the fiscal policy model discussed in the text. Be sure to explain the appropriate response to a recessionary downturn and an inflation. Be specific.

Answer 1

1. Two examples of leakage are taxes and imports.

Leakage is the outflow of money from circular flow of income.

Taxes are considered as leakage because this is the money taken from people and removed from circular flow. Although later it is spent as government spending but for the time being it is a deduction in Income.

Imports are considered as leakage because money is gone to foreign for the imports. It reduces the amount of money from circular flow of income.