A2 Economics – National Income Equilibrium – Multiple Choice

In preparation for P3 on Thursday here are a couple of A2 multiple-choice questions that some students have struggled with.

Question 1

In a closed economy, where the full-employment level of income is $90 million, C = ²/₃ Y and I = $(40-3r) million, where C = consumption, Y = income, I =investment and r = the rate of interest. If planned government expenditure is $20 million, what rate of interest would be required for there to be full employment?

A  10% per annum B 12% per annum C  14% per annum D  16% per annum

Answer: A

Y = C + I + G

90 = ²/₃(90) + (40 – 3r) + 20

90 = 60 + 20 + 40 – 3r

3r = 30

r = 10%

Question 2

In a closed economy with no government sector, there is no autonomous consumption and the marginal propensity to consume is 0.7. At the beginning of a time period firms set production targets of goods worth $1000 m of which planned sales to consumers = $800 m and planned additions to stocks = $200m.

Which one of the following statements is correct?

A       The economy is in equilibrium, with planned savings and investment equal to $200m.

B       The economy is in disequilibrium, with planned investment greater than planned savings.

C       The economy is in disequilibrium, with planned aggregate demand of $800 in, and planned aggregate supply of $1000m.

D       There will be an unplanned increase in stocks in $100in.

Answer

D       NY = $1000m and MPC = 0.7, thus planned consumption is $1000 x 0.7 = $700m while planned sales by firms = $800. This will lead to an increase in unplanned stocks by $100m.