Question

If a rise in national income of £100m causes consumption of domestic goods and services to rise by £60m, the multiplier is:

a- 6

b- 4

c- 2.5

d- 2

If real national income (i.e. measured in base-year prices) were £60bn, if prices had doubled since the base year, and if the velocity of circulation were 10, then the level of money supply would be:

a- £120bn

b- £60bn

c- £12bn

d- £6bn

Assuming that the price level is 3.00 (and that it was 1.00 in the base year), that the real level of national income in base-year prices is £4bn and that the money supply is £2bn, the velocity of circulation of money will be:

a- 12

b- 8

c- 6

d- 2

A country has the following items in its balance of payments:

Exports of goods £120m; Imports of services £60m Income flows and current transfers from abroad £80m Exports of services £50m; Imports of goods £150m Income flows and current transfers going abroad £30m Its current account balance is a:

a- Deficit of £40m

b- Deficit of £30m.

c- Deficit of £20m

d- Surplus of £10m

Answer 1

Ans-1 change in consumption (∆C)= £60m

Change in income(∆Y) = £100m

Marginal propensity to consume(MPC)= ∆C/∆Y

MPC= 60/100

MPC=0.6

we know that,

MPC+MPS=1

0.6+MPS=1

MPS=0.4

value of multiplier(K)= 1/MPS

K= 1/0.4

K= 2.5

Hence the value of multiplier=2.5

Ans-2 Given that,

Real national income(GDP) = £60bn

Velocity of circulation of money= 10

Total money supply=?

We know that,

Velocity of circulation = GDP/total money supply

10= 60/total money supply

Total money supply= 60/10

Total money supply= £6bn

Ans-3 GDP=£4bn

Money supply= £2bn

Velocity of circulation=GDP/total money supply

Velocity of circulation= 4/2

Velocity of circulation=2

Ans-4 calculatig inflows

Exports of goods+ income flows and current transfers from abroad+ exports of services

= £120m+£80m+£50m

=£250m(inflows)

Calculating outflows

= Import of services+import of goods+ income flows and current transfers going abroad

= £60m+£150m+£30m

=£240m

Inflows are more than outflows it means there will be a surplus in current account

Surplus=inflows - outflows

Surplus=£250m-£240m

Surplus= £10m

Surplus of £10m.