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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 due to a fall in government spending, we can use the multiplier formula:
ext{Multiplier} = rac{1}{1 - ext{MPC}} = rac{1}{1 - 0.64} = rac{1}{0.36} ext{(approximately } 2.77 ext{)}Using the multiplier, we find the total reduction in GDP:
Thus, the total reduction in the UK's GDP from a fall in government spending of £20 million is approximately £55.4 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) is incorrect because imports are a withdrawal from the circular flow.
- C (Taxation) is incorrect for the same reason, as taxation removes money from the circular flow.
- D (Savings) is also a withdrawal from the circular flow, as money saved does not circulate through the economy.