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According to the Bank of England, the UK's marginal propensity to consume is estimated to be 0.64 - Edexcel - A-Level Economics A - Question 1 - 2022 - Paper 2
Question 1
According to the Bank of England, the UK's marginal propensity to consume is estimated to be 0.64. (Source: adapted from https://www.bankofengland.co.uk/-/media/boe/... show full transcript
Worked Solution & Example Answer:According to the Bank of England, the UK's marginal propensity to consume is estimated to be 0.64 - Edexcel - A-Level Economics A - Question 1 - 2022 - Paper 2
Step 1
Using the information above, calculate the total reduction in the UK's GDP from a fall in government spending of £20 million.
Answer
To calculate the total reduction in GDP, we need to use the multiplier formula:
Given that the marginal propensity to consume (MPC) is 0.64, we can substitute this value into the formula:
Now, to find the total impact on GDP from the £20 million reduction in government spending, we multiply the government spending decrease by the multiplier:
Thus, the total reduction in the UK's GDP from a fall in government spending of £20 million is approximately £55.6 million.
Step 2
Which one of the following is an injection into the circular flow of income?
Answer
The correct answer is B. Investment.
- A. Imports are not an injection; they represent a withdrawal from the circular flow of income.
- C. Taxation is also a withdrawal from the circular flow.
- D. Savings similarly represents a withdrawal.
Investment is the only option that adds money into the economy and thus acts as an injection.