Economics – The circular flow of income | e-Consult
The circular flow of income (1 questions)
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Calculation:
- Initial AD: C + I + NX + G = £60 + £20 + £10 + £40 = £130 billion
- Change in G: £15 billion
- Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.6) = 1 / 0.4 = 2.5
- Maximum increase in national income = Multiplier x Change in G = 2.5 x £15 billion = £37.5 billion
Explanation: The increase in government spending directly increases aggregate demand. The multiplier effect amplifies this initial change. The MPC of 0.6 indicates that 60% of each additional income is spent, leading to further rounds of expenditure and income generation. The table provides the initial components of aggregate demand, allowing for the calculation of the initial AD and the subsequent impact of the change in government spending.