1(a) Use the national income identity to calculate the current level of national income in Utopia. Is the government's budget in Surplus
or in deficit? If so, what is the size of the Surplus or deficit?

(b) What is (i) the average propensity to consume, and (ü) the marginal propensity to consume out of post-tax income?

c) The government believes that Utopia is operating at below füll capacity, and it decides to stimulate Output by increasing Y to 100, which is its estimate of full capacity?government expenditure. To what level should it raise G to increase


A macroeconomic model of Utopia
The national income identity is Y = C + I+ G (figures are in £billion)
Consumption function: C = 10.4 + 0.8(Y - tY)
where C is the level of total consumption. Y is national income, and t is the tax rate (so total taxes T = tY)
Currently, investment (I) is 5.6, government expenditure (G) is 12.8 and the tax rate (t) is 0.2.
Note: Knowing t = 0.2, it is easy to work out that disposable income, Y - tY, is equal to Y - (0.2 x Y) _(1 - 0.2) x Y= 0.8 x Y.
So C = 10.4 + (0.8 x 0.8 x Y) = 10.4 T 0.64 Y

Y=[10.4+0.8(Y-0.2Y)]+5.6+12.8
=[10.4+0.8+0.8Y] +5.6+12.8
=[10.4+0.64Y] +5.6+12.8
Y = 28.8+0.64Y
0.36Y=28.8
Y=80

Y=C+I+G
80=80+5.6+12.8 (w)

Vielen Dank

Gruss

Justin