Question

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	200	400	600	800	1000	1200	1400	1600	1800
Cd (£bn)	40	200	360	520	680	840	1000	1160	1320	1480
J (£bn)
E (£bn)

If firms are investing at a rate of £80bn per year and the government is spending £120bn 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 mpc_d? What is the value of the expenditure multiplier?

        (d)   Suppose that full employment yields a national income of £1400bn per annum, by how much must government expenditure be changed to reach full-employment income?

        (e)    Does the initial equilibrium situation represent an inflationary or a deflationary gap, and what is the size of this gap?

        (f)    Now assume that the government wishes to close this gap by changing taxes. By how much must taxes be initially raised or lowered. Explain your answer.

Answer 1