QUESTION 34 (5 marks)
In a simple closed economy without taxation, household disposable income rises by $200 million and consumption rises by $150 million. Calculate MPC, MPS and the multiplier. Estimate the final income increase from an additional autonomous $30 million of investment.
Practice marking scheme
Answer
MPC = 0.75; MPS = 0.25; k = 4; final income increase = $120 million.
Working
MPC = 150/200 = 0.75. MPS = 1 − 0.75 = 0.25. The simple multiplier is 1/0.25 = 4; multiplying the autonomous $30 million injection gives $120 million. This is a model estimate with unused capacity, stable propensities and no import/tax leakage.
Marking criteria
- Calculates MPC and MPS. [2 marks]
- Calculates k = 4. [1 mark]
- Calculates the $120 million final increase. [1 mark]
- Identifies a relevant simple-model assumption. [1 mark]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
View the QCAA syllabusCompare your working with the guide above.