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April 2009 Q32

E

e_sit

Member
Hi :)

For this question, can we not use Injection = Withdrawal to find the equilibrium national income?

ie. Injection = I + G + X = 200+400+300 = 900
and Withdrawal = S + T + M = 0 + 0.5Y + 0.3Y (assuming S = 0)

so 900 = 0.8Y and Y = 1125?

But this answer would be different than equating total Expenditure and National income which is in the model solution.

Thanks for the time guys!
 
You can use injections equals withdrawals, but you've got savings wrong in the withdrawals, as it doesn't equal 0.

Injections = I + G + X = 200 + 400 + 300 = 900

Withdrawals = S + T + M = S + 0.5Y +0.3Y

Here, as T = 0.5Y, disposable income after tax is equal to 0.5Y. Out of this, 60% is spent on consumption (i.e. C = 0.6*0.5Y = 0.3Y), so the other 40% must be saved. This means that S = (1 - 0.6)*0.5Y = 0.2Y.

So, withdrawals = 0.2Y +0.5Y + 0.3Y = Y

and injections = withdrawals gives Y = 900.

This question is odd as C and M are both equal to 0.3Y, which means that all goods consumed are imported rather than being produced domestically!
 
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