Question 1:
In a closed economy with no government sector, equilibrium national income occurs where aggregate
output (Y) equals aggregate expenditure (AE). Given that AE = C +I and that the consumption
and investment schedules are given by:
C = 70 + 0.75Y
I = 20
a) What is the equilibrium level of national income? [2 marks]
b) What is the value of the multiplier? [2 marks]
c) If the actual level of national income is 350 in the present period, in which direction will income
tend to move in succeeding periods? What would account for this movement in income?
[2 marks]
Question 2:
In a closed economy with government sector, equilibrium national income occurs where aggregate
output (Y ) equals planned aggregate expenditure (AE). Given that the consumption, investment
and government expenditure schedules respectively are:
C = 40 + 0.8YD
I = 40
G = 35
where disposable income (YD) is equal to YD = (1 − t)Y and the marginal tax rate (t) is 0.25
a) What is the equilibrium level of national income? [3 marks]
b) What is the level of savings at the equilibrium income level? [3 marks]
c) What is the value of the marginal propensity to save, and the multiplier? [3 marks]

Question 3:
The following information is available within a Keynesian income-expenditure framework of the
economy, where YD is disposable income, t is the marginal tax rate and T is the government’s tax
revenue:
C = 120 + 0.75YD
I = 55
G = 35
T = tY
t = 0.2
YD = (1 − t)Y
By how much should the government increase its expenditure to raise national income up to a level
of 610? Will the government be running a budget deficit or surplus at this level of income? What
is the size of this deficit/surplus?