Question

NATIONAL INCOME

The 2019 Zambian economy shows that the autonomous consumption expenditure is K185 million and the marginal propensity to save is 0.25. Investment function (I)=150+0.125y-10i, government expenditure is K100 million, and net taxes are K80 million. The report shows that investment, government expenditure and taxes are constant. The Central Bank indicated that the money markets are influenced by the money demand function M^d=300+Y-10i and money supply function M^s=350+90i. The statistics show that Zambian economy was not trading with the rest of the world.

Find the equilibrium aggregate expenditure *

Your answer

Find the equilibrium interest rates *

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state Zambia’s autonomous aggregate expenditure *

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Determine the size of the multiplier *

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MPC for the economy *

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What is Zambia’s aggregate consumption when real GDP is K1100 million? *

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What is Zambia’s planned investment when real GDP is K1500 million? *

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Answer 1

(1)

MPS = 0.25, so MPC = 1 - MPS = 1 - 0.25 = 0.75

In goods market equilibrium, Y = AE = C + I + G

Y = 185 + 0.75(Y - 80) + 150 + 0.125Y - 10i + 100

Y = 435 + 0.75Y - 60 + 0.125Y - 10i

(1 - 0.75 - 0.125)Y = 375 - 10i

0.125Y = 375 - 10i

Y = 3,000 - 80i..........(IS curve)

In money market equilibrium, Md = Ms

300 + Y - 10i = 350 + 90i

Y = 50 + 100i...........(LM curve)

Setting IS = LM,

3,000 - 80i = 50 + 100i

180i = 2,950

i = 16.39

Y (equilibrium AE) = 50 + 100 x 16.39 = 500 + 1,639 = 2,139

(2)

Autonomous aggregate expenditure = 435 - 60 - 10i = 375 - 10 x 16.39 = 375 - 163.9 = 211.1

(3)

Multiplier = 1 / MPS = 1 / 0.25 = 4

(4)

MPC = 0.75

(5)

When Y = 1100, C = 185 + 0.75(1100 - 80) = 185 + 0.75 x 1020 = 185 + 765 = 950

(6)

When Y = 1500, C = 185 + 0.75(1500 - 80) = 185 + 0.75 x 1420 = 185 + 1065 = 1,250

I = Y - C - G = 1500 - 1250 - 100 = 150