Hi I think I am missing some key bits of information to answer these questions. Can someone please go through how you get the answers? Questions attached. Thanks
Hi Amandeep, these are difficult questions! In both of these questions there is some autonomous consumption so: C= a + bY where a is autonomous expenditure on consumption and b reflects the marginal propensity to consume Q11 We are told the marginal propensity to save (mps) = 0.25. We are not given any information about other withdrawals eg taxes, so we assume they are zero and the marginal propensity to consume (mpc) must be 1-mps = 0.75. So for every additional £1 of income, 75p is spent on consumption We are also told autonomous expenditure = 15m So C = 15 + 0.75Y We are told Y = 200, so C = 15 + 0.75 x 200 = £165m ie Option B Q12 We are told the mps = 0.1. Again we aren't given any information about other withdrawals so we assume they are zero and so the mpc = 0.9 Autonomous consumption is £200m So C = 200 + 0.9Y At equilibrium, Aggregate Demand (AD) = National Income (Y) AD = C + I + G + X - M. But in this question we are told there is a closed economy with no government so X, M and G are zero So AD = C+ I So at equlibrium = 200 + 0.9Y + 500 = Y. Therefore at equilibrium, Y = £7000m Can you use this information to test each of the statements to identify which is correct? Gresham
Thanks Gresham! Managed to figure it out in the end, but do appreciate how you've laid the calculation steps out - certainly been helpful.
