Use the information in the table to answer the questions below. Marginal propensity to consume (MPC) 0.6 Marginal propensity to import (MPM) 0.2 Marginal propensity to pay tax (MPT) 0.2 Current equilibrium level of National Income €100 bn Level of National Income that would give full employment €150 bn Show your workings for all calculations. (i) Define marginal propensity to consume (MPC). (ii) Calculate the marginal propensity to save (MPS). (iii) Calculate the value of the multiplier in this open economy and explain the economic meaning of the figure calculated. (iv) Calculate the size of the injection required to bring this economy to the full employment level.

Leaving Cert Economics National Income: Use the information in the table

Use the information in the table to answer the questions below - Leaving Cert Economics - Question b - 2019

Question b

Use the information in the table to answer the questions below. Marginal propensity to consume (MPC) 0.6 Marginal propensity to import (MPM) 0.2 Marginal propensity... show full transcript

Worked Solution & Example Answer:Use the information in the table to answer the questions below - Leaving Cert Economics - Question b - 2019

Step 1

Define marginal propensity to consume (MPC).

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Answer

Marginal propensity to consume (MPC) refers to the proportion of each additional unit of income that is spent on goods and services. In other words, it measures how much consumption changes with a change in income.

Step 2

Calculate the marginal propensity to save (MPS).

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Answer

The marginal propensity to save (MPS) can be calculated using the formula:

$MPS = 1 - MPC$

Substituting the given MPC value:

$MPS = 1 - 0.6 = 0.4$

Step 3

Calculate the value of the multiplier in this open economy and explain the economic meaning of the figure calculated.

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Answer

The value of the multiplier (k) can be calculated using the formula:

$k = \frac{1}{1 - (MPC + MPM + MPT)}$

Substituting the values:

$k = \frac{1}{1 - (0.6 + 0.2 + 0.2)} = \frac{1}{1 - 1} = 1.25$

This multiplier of 1.25 indicates that any injection into the circular flow of income will have a 1.25 times larger effect on national income than the initial injection.

Step 4

Calculate the size of the injection required to bring this economy to the full employment level.

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Answer

To calculate the size of the injection (I) needed to reach the full employment level, we use:

$I = \frac{Change \ in \ Income}{Multiplier}$

The change in income required is:

$Change \ in \ Income = Full \ Employment \ Level - Current \ Level = 150bn - 100bn = 50bn$

Substituting into the equation:

$I = \frac{50bn}{1.25} = 40bn$

Therefore, an injection of €40 billion is required to bring the economy to full employment.

Use the information in the table to answer the questions below - Leaving Cert Economics - Question b - 2019

Worked Solution & Example Answer:Use the information in the table to answer the questions below - Leaving Cert Economics - Question b - 2019

Define marginal propensity to consume (MPC).

Calculate the marginal propensity to save (MPS).

Calculate the value of the multiplier in this open economy and explain the economic meaning of the figure calculated.

Calculate the size of the injection required to bring this economy to the full employment level.

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