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Study the table below and calculate (i) and (ii), showing all your workings - Leaving Cert Economics - Question 6 - 2012
Question 6
Study the table below and calculate (i) and (ii), showing all your workings. Year National Income Consumption Investment Exports Imports 1 €24,000 €15,000 €6,000 €1... show full transcript
Worked Solution & Example Answer:Study the table below and calculate (i) and (ii), showing all your workings - Leaving Cert Economics - Question 6 - 2012
Step 1
The Marginal Propensity to Save (MPS)
Answer
To calculate the Marginal Propensity to Save (MPS), we use the formula:
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Calculate Savings for Year 1:
- National Income (Y1) = €24,000
- Consumption (C1) = €15,000
- Savings (S1) = Y1 - C1 = €24,000 - €15,000 = €9,000
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Calculate Savings for Year 2:
- National Income (Y2) = €34,000
- Consumption (C2) = €22,000
- Savings (S2) = Y2 - C2 = €34,000 - €22,000 = €12,000
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Calculate the change in savings:
- Change in Savings = S2 - S1 = €12,000 - €9,000 = €3,000
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Calculate the change in income:
- Change in National Income = Y2 - Y1 = €34,000 - €24,000 = €10,000
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Find the MPS:
- MPS = Change in Savings / Change in Income = €3,000 / €10,000 = 0.3 or 30%
Step 2
The size of the Multiplier.
Answer
To determine the size of the multiplier (k), we first need to find the Marginal Propensity to Consume (MPC). This is related to MPS as follows:
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Determine MPC:
- MPC = 1 - MPS
- From previous calculations, MPS = 0.3
- Therefore, MPC = 1 - 0.3 = 0.7 or 70%
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Calculate the Marginal Propensity to Import (MPM):
- Given an increase in imports of €5,000.
- MPM = Change in Imports / Change in Income = €5,000 / €10,000 = 0.5 or 50%
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Apply the Multiplier Formula (using Method 1):
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Apply the Multiplier Formula (using Method 2):
Thus, the size of the multiplier is 1.25.