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National Income

QUESTION 1.
In a two sector economy, the business sector produces 7000 units at an average price of
Rs 5
(a) What is the money value of output?
(b) What is the money income of households?
(c) If households spend 80 percent of their income, what is the total consumer
expenditure?
(d) What is the total money revenues received by the business sector?
(e) What should happen to the level of output?
Solution:
(a) The money value of output is (7,000 5) = Rs 35,000.
(b) In a two sector economy, households receive an amount equal to the money value of
output. Therefore, money value of output i.e Rs 35,000.
(c) Total spending by households (Rs 35,000 0.8) ie. Rs 28,000.
(d) The total money revenues received by the business sector is equal to aggregate
spending by households ie. Rs 28,000.
(e) The business sector makes payments of Rs 35000 to produce output, whereas the
households purchase only output worth Rs 28,000 of what is produced. Therefore, the
business sector has unsold inventories valued at Rs 7000. They should be expected to
decrease their output in future.

QUESTION 2.
Assume that an economy's consumption function is specified by the equation C = 500 +
0.80Y.
(a) What will be the consumption when disposable income (Y) is Rs 4,000, Rs 5,000 and
Rs 6,000?
(b) Find saving when disposable income is Rs 4,000, Rs 5,000, and Rs 6,000.
(c) What amount of consumption for consumption function C is autonomous?
(d) What amount is induced when disposable income is Rs 4,000, Rs 5,000, Rs 6,000?
Solution:
(a) For Y = Rs 4,000, C = Rs 500 + 0.80 (Rs 4,000) = Rs 500 + Rs 3,200 = Rs 3,700.
when Y = Rs 5,000 ,C is Rs 4,500;
when Y = Rs 6,000 ,C Rs 5,300
(b) Saving is the difference between disposable income and consumption.
Using the calculation from part (a) above, we find that saving is
Rs 300 when Y is Rs 4,000;
Rs 500 when Y is Rs 5,000 and
Rs 700 when Y is Rs 6,000.
(c) Autonomous consumption is the amount consumed when disposable income is zero;
Therefore autonomous consumption is Rs 500.

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(d) Induced consumption is the amount of consumption that depends upon the level of
income. Hint: Induced Consumption = Amount Of Consumption(calculated in a) -
Autonomous consumption (calculated in c)
Induced consumption is Rs 3,200 when disposable income is Rs 3,700
Induced consumption is Rs 4,000 when disposable income is Rs 5,000, and
Induced consumption is Rs 4,800 when disposable income is Rs 6,000,

QUESTION 3.
Find the value of the multiplier when
(a) MPC is 0.2
(b) MPC is 0.5
(c) MPC is 0.8
Solution:
The value of the multiplier is found from the equation k = 1/(1 - MPC).
(a) Thus, when MPC is 0.2, the multiplier is 1.25
(b) When MPC is 0.5, the multiplier is 2
(c) When MPC = 0.80, the multiplier is 5

QUESTION 4.
For the linear consumption function is C = 700 + 0.8Y; I is Its 1200 and Net exports ( X-M)
= 100. Find equilibrium output (or National Income)?
Solution:
The equilibrium level of output can be found by equating output and aggregate spending
i.e by solving
Y =C+I+X-M 2.000
Y = 700 + 0.8Y + 1200 + 100
Y =10000

QUESTION 5.
If the consumption function is C = 20 + 0.5YD then an increase in disposable income by
Rs 100 will result in an increase in consumer expenditure by Rs.?
(a) 25 (b) 70 (c) 50 (d) 100 [C]

QUESTION 6.
If the autonomous csonsumption equals Rs 2,000 and the marginal propensity to
consume equals 0.8. If disposable income equals Rs 10,000, then total consumption will
be Rs?
(a) 8,000 (b) 6,000 (c) 10,000 [Hint: C = 2000+.80 x 10,000]
(d) None of the above

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QUESTION 7.
Calculate the Marginal Propensity to Consume (MPC) and Marginal Propensity to Save
(MPS) from the following data:
Income (Y) Consumption (C) Level
8,000 6,000 Initial level
12,000 9,000 Changed level
Solution:
Marginal Propensity to Consume (MPC) = Where C is change in consumption = (9,000 -
6,000) = 3000 and Y is change in income = (12,000 - 8,000) = 4000
Marginal Propensity to Consume (MPC) = = = 0.75
Marginal Propensity to Save (MPS) =1- MPC = 1 - 0.75 = 0.25

QUESTION 8.
Suppose that the consumption function is C = 200 + 0.6Y and the. income level is 2000
billion. Calculate what consumers intend to consume and save at this income level.
Solution:
C = 200 + .6Y;Y = 2000 billion.
C= 200+.6(2000) = 1400 billion.
S = Y-C = 2000-1400= 600 billion.
Consumers intend to consume 1,400 billion and save 600 billion.

QUESTION 9.
An increase of investment by Rs. 600 Crores resulted in an increase in national income by
2400 Crores. Find MPC and MPS.
Solution:
Investment Multiplier (k) = = = =4

Now , Investment Multiplier (k) = or 4 = or MPC = 0.75

MPS= 1-MPC = 0.25

QUESTION 10.
For an Economy with the following specifications
Consumption, C = 50+0.75 Yd
Investment, I = 100
Government Expenditure, G = 200
Transfer Payments, R = 110
Income Tax = 0.2Y
(i) Find out the equilibrium of income and the value of expenditure(spending or
Investment) multiplier.
(ii) If autonomous(additional) taxes worth Rs.25 Crores are added. Find out equilibrium
level of Income.

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(iii) If the economy is opened up with exports X = 25 and imports M = 5+0.25Y Calculate
the new level of Income and balance of Trade (Assume that there are no autonomous
Taxes.)
Solution: -
(i) Level of Disposable income Yd is given by
Yd = Y - Tax + Transfer Payments [This part will be explained in next chapter]
Yd=Y- 0.2 Y+110 or Yd= 0.8Y+110,
and C = 50 + 0.75 Yd = 50 + 0.75 (0.8Y +110) or C = 132.50+0.6 Y
Now Y=C+1+g,
Y= (132.50+0.6Y) + 100 + 200
or Y = Rs. 1,081.25 Crores

Expenditure (Investment) Multiplier = = = 2.5

(ii) autonomous taxes worth of Rs. 25 Crores added, this will reduce disposable income by
Rs. 25 crores
Level of Disposable income Yd is given by Yd = Y - Tax + Transfer payments
Thus Yd = Y - 0.2Y + 110 - 25 = 0.8Y +85
C = 50+0.75(0.8Y +85) or C = 113.75+0.6Y
Y C+1+G = (113.75+0.6Y) +100+200 or Y = Rs. 1034.375 Crores.

(iii) Y = C +1+ G+ (X-M), Where Consumption, (C)= 132.50+0.6 Y, Investment(1) = 100,

Government Expenditure (G) = 200; X = 25, M = 5+0.25 Y
Putting All we get
Y = Rs. 696.15 Crores

Imports = 5+0.25Y = 5+ (0.25x696.15) = Rs. 179.04 Crores

Balance of trade = Exports - Imports
Balance of Trade = 25-M = 25-179.04 = - Rs. 154.04 crores.
Thus, there is adverse balance in Trade of Rs. 154.04 crores

QUESTION 11.
Suppose in an economy:
Consumption Function C =150 + 0.75 Yd
Investment spending I = 100
Government spending G =115
Tax Tx = 20 + 0.20 Y
Transfer Payments Tr = 40
Exports X=35
Imports M=15 +0.1 Y

Where, Y and Yd are National Income and Personal Disposable Income respectively. All
figures are in rupees.

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Find:
(i) The equilibrium level of National Income
(ii) Consumption at equilibrium level
(iii) Net Exports at equilibrium level
Solution:
The consumption function is C =150 + 0.75Yd
Level of Disposable income Yd is given by
Yd = Y-Tax + Transfer Payments or Yd = Y -'(20+ 0.20 Y) + 40
or Yd = 20 + 0.8 Y and

C =150+0.75 Yd
C = 150 + .75 (20 +0.8 Y)
C = 165 + 0.6Y
(i) The equilibrium level of national income
Y=C+I+G+(X-M)
Y = 165 + 0.6Y+100+115+ [35 - (15+0.1Y)] or Y = 800

(ii) Consumption equilibrium level of national income of 800

C = 165 + 0.6Y or C = 165 + 0.6(800) or C =165+480=645

(iii) Net Exports at equilibrium level of national income 800

Net exports = Value total exports - Value of total imports

Given exports X = 35; and imports M = 15+0.1Y
Net exports = [35 - (15+0.1Y)] = 35 -15 - 0.1Y =35 -15 - (0.1 x 800) = (-) 60
There is an adverse balance of trade

Question 12.
An Economy is characterised by the following equations:
Consumption (C) = 100+0.9 Yd
Investment (I) = 100 ; Government Expenditure (G) = 120 ; Tax (T) = 50 ; X (Exports)
= 200 ; M (Imports) =100+0.15 Y
(i) What is the equilibrium Income?
(ii) Calculate trade balance.
(iii) What is the value of Foreign Trade Multiplier?
Solution:
(i) National Income
Y = C+I+G+(X-M)
or Y = (100+0.9Yd) +100+120+200-(100+0.15Y)
or Y= 1500.00
(ii) Trade balance = X- M
= 200- (100+0.15Y)
Substituting the value of Y = 1500 We have

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Trade Balance = -125

Trade balance is in deficit of 125.
(iii)Value of foreign trade Multiplier = –
Where b marginal propensity to consume, and m is marginal propensity to import. (Here
MPC = 0.9 and marginal propensity to Import (m) = 0.15
Foreign trade Multiplier = = –
=4

QUESTION 13.
The level of real GDP is Rs 1,000 billion, the full employment level of real GDP is Rs. 1,250
billion, and the marginal propensity to consume (MPC) is 0.60. How much government
spending would be needed to raise income to full employment level?
Solution:
Investment Multiplier (k) = = 2.5 or Investment Multiplier (k) = =2.5
– –

Now, Investment Multiplier (k) =

or 2.5 =
or Change In Investment (Spending) = 100 Billion.

QUESTION 14.
Consumption function C= 100+0.75Y and I = 1000, calculate equilibrium level of national
income. What would be the consumption expenditure at equilibrium level national
income?
Solution:
C= 100+0.75 Y and I =1000,
Y=C + I or Y =100 + 0.75 Y+ 1000 or Y= 4400
;C= 4400 -1000 = 3400

Question 15. (37)

For an Economy, you are given the following data:
C = 100 + 0.7 Yd
I = 211
G = 400
TR = 150
I.Tax = 0.3Y
Find
a) Eq. Income
Ans. 1600
b) Cons. At Eq. Income
Ans. 989
c) Value of multiplier
Ans. 1.96

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d) If autonomous (additional) taxes worth 50 are added, find the new Eq. Income
Ans. 1531.37255
e) If I.Tax = 0.2Y, find new Eq. Income
(assuming no autonomous tax of 50)
Ans. 1854.54

Question 16. (38)

Given
C = 200+0.8Yd
I = 500
G = 400
TR = 250
TX = 100 + 0.25Y

Find
a) Equilibrium level of Income
Ans. 3050
b) Consumption at equilibrium Income
Ans. 2150
c) Value of Multiplier
Ans. 2.5
d) If only G increases to 600 find Eq. Y
Ans. 3550
e) If only TR increase 500 find Eq. Y
Ans. 3550
f) If only TX = 200 + 0.3Y find Eq. Y
Ans. 2590.909

Question 17. (39)

C = 300+0.9Yd
I = 500
G = 400
Tax = 100+0.3Y
TR = 200
X = 600
M = 50+0.2Y

Calculate
(i) Eq. Income
Ans. 3228.07
(ii) Cons. At Eq. Income
Ans. 2423.684
(iii) Value of F.T. Multiplier

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Ans. 1.754
(iv) Balance of Trade (NX) at Eq. Income
Ans. -95.614
(v) If I = 700, G=500, TR = 250
Ans. 3833.33

Question 18. (40)

C = 500+0.8Yd
I = 250
G = 500
Tax = 0.25Y
TR = 100
X = 800
M = 130+0.1Y

Find
(i) Equilibrium National Income
Ans. 4000
(ii) Consumption at Equilibrium Income
Ans. 3700
(iii) Value of (Foreign Trade) Multiplier
Ans. 2
(iv) Net Exports (BOT) at Equilibrium level.
Ans. 270
(v) If marginal propensity to import increases to 0.2
Find new equilibrium Income and autonomous imports increase by Rs. 200
Ans. 3000
(vi) Find New value of Multiplier.
Ans. 1.666

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