Question

In a closed economy (i.e. one that does not engage in foreign trade), spending on consumer...

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 mpcd? 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.

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