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Exercise (NATIONAL INCOME EQULIBRIUM)

Question 1

Use the consumption Schedule below to answer the following questions:

Income ( RM billion)	Consumption (RM billion)	Saving (RM Billion)
100	175	-75
200	250	-50
300	325	-25
400	400	0
500	475	25

a. Fill in the blanks

Firstly, we have to find the Consumption function

C = a + byd

175 = a + b(100)

175= a + 100b----1

C = a + byd

250 = a + b(200)

250 = a + 200b----2

Using linear equation to solve this problem to get value of a and b

175 = a + 100b---1

250 = a + 200b---2

(2 – 1)

75 = 100b

b= 75 / 100

B= 0.75, 75%

To find the autonomous consumption, you have to understand what is meant by autonomous

autonomous consumption occurs when the level of income is ZERO

therefore, we can find the autonomous consumption by suing the formula MPC

MPC = change in consumption/ change in income

0.75 = 175 - X / 100 - 0

0.75 x 100 = 175 - x

75 = 175 - x

-x = 75 - 175

x = 100

thus, the autonomous consumption is RM 100 Billion

we can find the saving function from the consumption function

Consumption function

C= 100 + 0.75yd

Since the MPC+MPS=1

MPC= 0.75

So MPS= 1-0.75=0.25

Therefore the saving function will be

S= -a + (1-mpc)yd

S= -100 + 0.25yd

Hence, we can easily find the amount of saving in the schedule by using this saving function

For instance, S = -100 + 0.25(100)

= -75

b. Define autonomous consumption and marginal propensity to consume (MPC) and find their values.

Autonomous consumption can be defined as the consumption that doesn’t depend on the level of income. For instance, necessity goods (barang keperluan)

Marginal propensity consumption can be defined as the relationship between change in income and a change in consumption.

The formula as follows

MPC= change in total consumption

Change total income

∆C

∆Y

c. Write the saving function

S= -a + (1-mpc)yd

S= -100 + 0.25yd

Question 2

The following is the information of spending in a country ZZ. All of the values are in RM million

Consumption Function = 400 + 0.60Yd

Investment Function = 202

Public expenditure ( Government expenditure) = 250

Tax = 20 autonomous taxes

Net exports = 120

a) Compute the equilibrium level of national income for the above economy.

The equilibrium level of national income for the economy can be calculated by using the AS = AD approach

According to the data above, it is about 4 sector econom,

AS= Y

AD = C + I + G + (X – M)

Y= 400 + 0.60Yd + 202 + 250 + 120

Y= 400 + 0.60 ( Y – 20 ) + 572

Y= 400 + 0.60Y – 12 + 572

Y – 0.60Y = 400 – 12 + 572

0.40Y = 960

Y = 960 / 0.40

Y =RM 2400m

b. assume that full employment would be experienced at an income level of RM3000 million using the spending multiplier, compute the change in the amount of government spending required to achieve the full employment income level

Government spending multiplier= Government Expenditure multiplier

The formula for government spending multiplier is

K_{g =} Change in income ∆Y

Change in Government Expenditure∆G

Government spending multiplier (KG) = 1 / 1 – MPC

MPC = 0.60

1 / 1 - 0.60

= 2.5

Government spending multiplier = 2.5

Thus

New income = 3000

Previous income = 2400

Change in income = 3000 – 2400 = 600

2.5 ₌ 600

Change in Government Expenditure∆G

2.5G = 600

G = 600 / 2.5

G=RM240m

Therefore, the change in amount of government spending is G = RM240m

d. What is marginal propensity to save (MPS) and what is the relationship between MPS and marginal propensity to consume (MPC)

MPC + MPS = 1

MPC = 0.60

So, MPS will be 1 – 0.60 = 0.40

The relationship between MPS and MPC is the higher of MPC the lower MPS or vice versa due to MPC + MPS = 1

Question 3

The following are information regarding an economy in year 2007

Consumption (c) = 300 + 0.6Yd

Investment (I) = 500

Government expenditure(G) = 700

Tax (T) --induced tax = 60

a. Define national income equilibrium and state the condition for national income equilibrium. Calculate the equilibrium level of national income for this year.

National income equilibrium occurs when there is no tendency for change.refer to the situation in which neither consumers nor firms have any incentive to change their behavior. Refers to the state when aggregate demand AD, equals the total amount of national output which is aggregate supply, Y, (which corresponds to total national income or production). Here, total demand equals total supply.

Equilibrium in this diagram occurs where total demand, AD, equals the total amount of national output, Y, (which corresponds to total national income or production). Here, total demand equals total supply.

In the diagram, the equilibrium level of output and demand is determined where this desired spending curve intersects a line that represents the equality of total income and output (AD=Y). The intersection gives the equilibrium output, Y.

I am using the AS = AD to calculate the national income equilibrium for this year

AS = AD

AS = Y

Y = C + I + G + (X – M)

Y= 300 + 0.6Yd + 500 + 700

Y= 300 + 0.6 ( Y – T) +1200

Y= 300 + 0.6 (Y – 60) +1200

Y = 300 + 0.6Y – 36 + 1200

Y – 0.6Y = 300 -36 +1200

0.4Y = 1524

Y = 1464 / 0.4

Y= 3,660

State the condition for national income equilibrium

Concept of equilibrium refers to the state when:

Aggregate demand = aggregate supply

Injection = leakage

b. Determine the total consumption at the equilibrium level of national income

C = 300 + 0.6 Yd

AS = AD

Y = 3660

Yd=Y - Taxes

T=60

therefore Yd= 3660 - 60 = 3600

So, C = 300 + 0.6(3600)

C = 2,460

c. Of the full employment income level is RM 5,000 determine the change in government expenditure required to achieve the full employment level of income.

Government spending multiplier= Government Expenditure multiplier

The formula for government spending multiplier is

K_{g =} Change in income ∆Y

Change in Government Expenditure∆G

Government spending multiplier (KG) = 1 / 1 – MPC

MPC = 0.60

1 / 1 - 0.60

= 2.5

Government spending multiplier = 2.5

Thus

New income = 5000

Previous income = 3660

Change in income = 5000 – 3660= 1340

2.5 ₌ 1340

Change in Government Expenditure∆G

2.5G = 1340

G = 1340 / 2.5

G=536

Therefore, the change in amount of government spending is ∆G = 536

Question 4

The following information shows the saving and investment for a 2 sector economy

S = -100 + 0.2 Y

I = 200

a. Determine the values of MPC and write the consumption function

MPC + MPS = 1

MPC = 0.2

So, MPC will be 1 – 0.2 = 0.8

The relationship between MPS and MPC is the higher of MPC the lower MPS or vice versa due to MPC + MPS = 1

C= 100 + 0.8Yd

b. If income level is RM2000, how much the total consumption

C = 100 + 0.8Yd

C = 100 + 0.8 (2000)

C= 100 + 1600

C = 1,700

c. Suppose investment increase by RM100, what is the new equilibrium income level

Using injection = leakage method to solve this Q

Injection = Leakage

S = I

-100 + 0.2Yd = 200+100

-100 + 0.2Yd = 300

0.2Yd = 300 + 100

0.2Yd = 400

Y = 400 / 0.2

Y = 2000

Therefore, the new equilibrium income level is RM2000

P/S: All of these answer have not been discussed by lecture

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