Question

The Zambian communities have benefited from the Constituency Development Funds and Social Cash Transfer. The Minister of Finance has set aside K249 million towards Constituency Development Funds and K1, 047 million for Social Cash Transfer in the 2021 budget. Assuming that 77% will be paid as income and salaries to the household beneficiaries and spent as follows:

•Social Cash Transfer and Constituency Development Fund ( K 1, 297 million)],

•Households received salaries ( K1,000 million ) and spent part of it in shops and schools ( K900 million),

•Shops Paid suppliers and employees ( K350 million),

•Schools Paid employees and other operation expenses (K100 million)

1. Calculate the injected amount in circulation and the new National Income level due to

       Social Cash Transfer and Constituency Development Fund [5 Marks]

2. Determine the Multiplier Effect due to Social Cash Transfer and Constituency Development Fund                                                       [5 Marks]
3. Given that a monthly average household income has been increased to K7, 500 million, and Marginal Propensity to Consume (MPC) is 0.75, determine the; Change in Consumption, Change in Savings, Marginal Propensity Save                                                                                                [5 Marks]

Answer 1

Ans i) Social Cash Transfer and Constituency Development Fund = 1,297

Households received salaries = 1,000 spent part of it shops and schools = 900

Shops paid suppliers and employees = 350 , Schools paid employees and other operation expenses = 100

National Income = Social cash transfer & constituency fund + (household salaries - spent part of it schools and shops) - shops paid suppliers and employees - schools paid employees and other operation expenses

National Income = 1,297 + (1,000 - 900) - 350 - 100

National Income = 1,297 + 100 - 350 -100

National Income = 1397-450

National Income = 947

ii) Cash transfer programs influence multiplier effects when recipients put the money they receive to work to produce additional income. The ultimate income effects are multiples of the amounts transferred. The transfer rules and the timing of the panel data collected allow unique control of biases in this impact analysis. Multipliers are higher for medium and large farm households, therefore low numbers of adults in the household, non - indigenous backgrounds, and households located in the Center and Gulf regions. High multipliers reflect marginal income opportunities that were unrealized due to liquidity constraints that the transfers eased. Opportunities came from the asset endowments that these households have, particularly irrigated land, and these opportunities were escalated by access to technical assistance.

iii) MPC = 0.75 , MPS = ?

MPC + MPS = 1

0.75 + MPS = 1

MPS = 1 - 0.75

MPS = 0.25

Y = 7,500 , MPC = 0.75 , change in consumption (C) = ?

(Change in consumption / Change in Income) = MPC

C/Y = MPC,   

C/7,500 = 0.75

C = 7500*0.75

C = 5,625

Y = 7,500 , MPS = 0.25 , Change in saving (S) = ?

(Change in saving / Change in Income) = MPS

S/ Y = MPS

S/ 7,500 = 0.25

S = 7500*0.25

S = 1875