I. Suppose in this economy aggregate o utput-S6200, consumption spending-34500,
ID: 1118245 • Letter: I
Question
I. Suppose in this economy aggregate o utput-S6200, consumption spending-34500, investment spending $1100, net taxes-$900, transfers-$100, government budget surplus = $80 exports $150. A government pays no subsidies to firms and firms pay no indirect taxes. (a) Draw a circular diagram for this type of economy. Label all the flows. (b) For this economy calculate: ssume householders are the owners of the firms and there are no corporations (i) the value of the disposable income in this economy; (ii) the amount of government purchases (iii) the value of net exports; (iv)the value of net foreign investment; (v) the amounts of - the private saving, - the public saving, - the national saving, - the foreign sector saving (c) Is government a lender or a borrower in the financial market? Explai (d) Is there capital inflow or outflow? Explain. Define if the country is a borrower or a lender Why? (e) How is investment financed in this economy? Give your calculations and explanation. (O Put figures for all the flows in this economy on your diagram from point II (a) fine the difference between the injection and the leakage. Identify each of the flows on your diagram as either an injection or a leakage. What other examples of injections and leakages can you give (that are not included in your diagram according to the task)? are the results and make a (h) Calculate the sum of leakages and the sum of injections. Comp common conclusion about the relation between infections and leakages in the complete four- sector model of the economy.Explanation / Answer
(Q1)
Marginal propensity to consume (MPC) = 90% / 100% = 0.9
Spending multiplier = 1 / (1 - MPC) = 1 / (1 - 0.9) = 1 / 0.1 = 10
As government spending increases by $1, output increases by $10.
As government spending increases by $400, output increases by $400 x 10 = $4,000
(Q2)
Marginal propensity to save (MPS) = 25% / 100% = 0.25
Spending multiplier = 1 / MPS = 1 / 0.25 = 4
As government spending decreases by $1, output decreases by $4.
As government spending decreases by $4,000, output decreases by $4,000 x 4 = $16,000
NOTE: First 2 questions are answered.