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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 will use the multiplier formula:
Given the marginal propensity to consume (MPC) is 0.64:
The total reduction in GDP can then be calculated as:
Substituting the values we have:
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 as they represent expenditure leaking from the circular flow.
- C) Taxation is also a withdrawal from the circular flow of income.
- D) Savings are a withdrawal as they represent income not being spent within the economy.
Thus, the only injection is through investment, which stimulates economic activity.