Principle

of
Economics 2015
Topic 3: National Income Equilibrium
Sophian bin Sout
Topic 3: National Income
Equilibrium
Part 1: Introduction
Part 2: Consumption
Part 3: Saving
Part 4: Investment
Part 5: Government Expenditure & Taxes
Part 6: Import & Export
Part 7: Calculate National Income Equilibrium
Part 8: Circular Flow Of Income
National Income
Equilibrium
Part 1

Introduction
Keynes argued that

an economy could reach

equilibrium but not
necessarily at the full
employment.
Equilibrium will occur when
there is no tendency for an
economy to change. It refers to
a situation when all consumers
and firms have no incentive to
change their behaviour.

Full employment
equilibrium is the situation of
equilibrium in an economy at the
best efficient and full utilization
of resources.

Approach
Determine National Income Equilibri
Total Approach.
Injection-Leakage Approach.
Approach
Determine National Income Equilibri
Total Approach.
Equilibrium may occur when planned aggregate
expenditure is equivalent to planned output.
(AD = AS)
(aggregate demand = aggregate supply).
Keynesian model is drawn based on the
relationship between income and
Y =expenditure:
C + I + G + (X M)
where,
C = f (Yd) ,

C is a function of Real
Disposable Income
(income after tax), where,
Yd = Y t .
Injection-Leakage Approach.
Approach
Determine National Income Equilibri
Total Approach.
Injection-Leakage Approach.
Equilibrium also can be determined when:
INJECTION = LEAKAGE
Injections are additional spending
from:
investments (I),
government
purchases (G) and
exports (X).
Leakages are withdrawals from:
savings (S),
tax payment (T) and
imports (M).
So, at equilibrium,
 Try this: Exc.1

Given the following information:

C= 200+0.75Yd
I=100
G=50
T=100
X=100
M=50

Calculate the national equilibrium using TOTAL APPROACH

Step 1:Derive the new C after tax:

C=200+0.75yd
T=100
C=200+0.75 (Y-t)
C=200+0.75(Y-100)
C=200+0.75Y-75
C=125+0.75Y

Step 2: Calculate the national income equilibrium

Y=C+I+G+(X-M)
Y=125+0.75Y+100+50+(100-50)
Y=325+0.75Y
Y-0.75Y=325
0.25Y=325
Y=325/0.25
Y=1300
 Try this: Exc2

Given the following information:

S= -200+0.25Yd
I=100
G=50
T=100
X=100
M=50

Calculate the national equilibrium using INJECTION-LEAKAGE APPROACH

Step 1: Derive new S after tac

S=-200+0.25Yd
T=100
S=-200+0.25(Y-T)
S=-200+0.25(Y-100)
S=-200+0.25Y-25
S=-225+0.25Y

STEP 2: calculate the national income equilibrium

S+T+M=I+G+X
-225+0.25Y+100+50=100+50+100
-125+0.25Y=250
0.25Y=250+125
0.25Y=325
Y=325/0.25
Y=1300
 consumption
&SAVING
Disposable Income is used for
Consumption spending and Saving.
Yd = C + S
and, C = f (Yd), S = f (Yd)
Both C and S is a function of income,Y
and having a positive relationships.
( Y rises, C and S also will rise).
Consumption function: C =
a + bYd
and
Saving function: S = a +
(1 b) Yd
CONSUMPTIO SAVING
N
C = a + bYd S = -a + (1
b)Yd
C = 100 +
0.75Yd
S = -250 +
0.2Yd
S = -85 +
0.15Yd
C = 550 +
0.70Yd
CONSUMPTIO SAVING
N
C = a + bYd S = -a + (1
b)Yd
C = 100 + S = -100 +
0.75Yd 0.25Yd
C = 250 + S = -250 +
0.8Yd 0.2Yd
C = 85 + S = -85 +
0.85Yd 015Yd
C = 550 + S = -550 +
0.70Yd 0.30Yd
 National Income
Equilibrium
Part 2

Consumption (C)
There is (two)2 components of
Consumption spending by households:
C1, Autonomous Consumption = a

C2, Induced Consumption = bYd

Where,
b is the Marginal Propensity to
Consume (MPC).
C1 = a is a fixed amount irrespective
of the income earned,
is the part of consumption which
does not vary with the level of
income (Y increases but a is
constant).
C2 = bY is an amount that depends
on the disposable income,
is the amount of consumption
spending by households that is
induced by disposable income (Y
increases, C2 increases).
Consumption function, C = f (Yd)
C
C = a + bYd
a

real output, Y
The slope of consumption function is given
by:
b = C/ Y
= Marginal Propensity to Consume
(MPC)
and the value 0 < b < 1 (positive but
 is the vertical intercept of the
consumption function,
at a (in the diagram).
C
C = a + b Yd

0 real output, Y

It is the amount of consumption

that would occur even if the
household earned nothing, Y=0.
when Y= 0 (no income earned), C =
a.
(basic consumption for living).
 Y C S
0 60 -60
100 120 -20
200 180 20
300 240 60
400 300 100
500 360 140

With no income earned, Y = 0 ,

autonomous C = a = 60 and dissaving = - a = - 60.
While Y = C + S , if Y = 0 , then C = - S.
How is the increase in income will
increase consumption?

Consumption is induced by the

value of b (that is = MPC),

since,

C = a + bY
FOR EXAMPLE:

Given that C = a + bY, therefore, if b = 0.6 , how

large is the increase in consumption if there is an
increase in income?
Since C = a + 0.6Y, thus C will increase by 0.6Y ,
(given a = fixed or autonomous consumption) ,
so, C will increase by 60% out of total income, Y.

Meaning that, for any increase in income,

40% can be saved and

60% will be spend on
consumption.
a change in income from RM1000 to
RM1500 with the MPC = 0.6,
C = bY
= 0.6 (500) = 300.
Therefore, consumption will increase
by RM300.
 Y C S
0 60 -60
100 120 -20
200 180 20
300 240 60
400 300 100
500 360 140

In a 2-sector economy, C = a + bY .
Since C = a + 0.6Y, and a = 60 thus C = 60 + 0.6Y.
At income 200, C = 60 + 0.6(200) = 60 + 120 = 180
and Y = C + S
so , S = Y C = 200 -180 = 20.
ry This; Complete the table
Income Consumptio Incom Consumpti
n e on
C=200+0.7 C=100+0.7
5Yd 5Yd
0 0
1000 1000
2000 2000
3000 3000
4000 4000
5000
Income Consumptio 5000
Incom Consumpti
n e on
C=85+0.85 C=750+0.6
Yd 5Yd
0 0
1000 1000
2000 2000
3000 3000
4000 4000
ry This; Complete the table
Income Consumptio Incom Consumpti
n e on
C=200+0.7 C=100+0.7
5Yd 5Yd
0 200 0 100
1000 950 1000 850
2000 1700 2000 1600
3000 2450 3000 2350
4000 3200 4000 3100
5000
Income 3950
Consumptio 5000
Incom 3850
Consumpti
n e on
C=85+0.85 C=750+0.6
Yd 5Yd
0 85 0 750
1000 935 1000 1400
2000 1785 2000 2050
3000 2635 3000 2700
4000 3485 4000 3350
Try This;
Derive Consumption function
Incom Consumpt Incom Consumpt
e ion e ion
0 200 0 100
1000 950 1000 850
2000 1700 2000 1600
3000 2450 3000 2350
4000 3200 4000 3100
5000 3950 5000 3850

Incom Consumpt Incom Consumpt

e ion e ion
0 85 0 750
1000 935 1000 1400
2000 1785 2000 2050
3000 2635 3000 2700
4000 3485 4000 3350
5000 4335 5000 4000
Changes in consumption when
income change.

consumption
Y=C
C=a+bY
400 C Note: b= C
Y Y
= 400
500
45
income
1000 1500
Changes in consumption when
income change.

consumption Y=C

C=a+bY
400 C Note: b= C
e Y Y
a
= 400
45
500
income
1000 1500
National Income
Equilibrium
Part 3

Saving (S)
Def:
SAVING is the portion of household income that is not
spent and saved in financial institutions.

Characteristics:

When Y=0, saving are negative because household

have to use accumulated saving to pay for consumption

APC
MPC

When Y increase, saving increase

if
 C
MPC =
Y

C
APC =
Y
when Y (increase), C (increase)

when Y (decrease), C (decrease)

so
 S
MPS =
Y

S
APS =
Y
when Y (increase), S (increase)

when Y (decrease), S (decrease)

Practise

001
Complete the table
Diposable Consumpti APC MPC Savin APS MPS
income on g
(Yd) (C) (S)

0 500
1000 1000
2000 1500
3000 2000
the answers.
Diposable Consumpti APC MPC Savin APS MPS
income on g
(Yd) (C) (S)

0 500 - -500 -
1000 1000 1 0 0
2000 1500 0.7 500 0.2
5 5
3000 = C
APC 2000 0.6APS = S 100 0.3
Y 7 Y 0 3
1500 500
= =
2000 2000
= 0.75 = 0.25
the answers.
Diposable Consumpti APC MPC Savin APS MPS
income on g
(Yd) (C) (S)

0 500 - 0. -500 - 0.
1000 1000 1 5
0. 0 0 5
0.
2000 1500 0.7 5
0. 500 0.2 5 0.
5 5 5 5
C0.6
3000 2000
MPC = 100 = S
MPS 0.3
Y 7 0 3 Y

=
1000-500 = 0-(-500)
1000-0 1000-0
= 0.5 = 0.5
Derive Consumption and Saving Function
Diposable Consumpti APC MPC Savin APS MPS
income on g
(Yd) (C) (S)

0 500 - 0. -500 - 0.
1000 1000 1 5
0. 0 0 5
0.
2000 1500 0.7 5
0. 500 0.2 5
0.
5 5 5 5
3000 2000 0.6 100 0.3
7 0 3
Consumption and Saving Function

C = a + bY S = -a + (1-b)Y
@
C = a + (MPC)Y S = -a + (MPS)Y

Where a = autonomous consumption (when Y=0)

If a = 500
So
C = 500 + (MPC)Y S = -500+ (MPS)Y
 Consumption

Y = AD C = a + bY?

0 Income
?

Saving

?
S = - a + (1-b)Y

0 Income
?
?
the answers.
C MPS = S
MPC =
Y Y
0-(-500)
= 1000-500 =
1000-0 1000-0
= 0.5 = 0.5

C = 500 + (MPC)Y S = -500 + (MPS)Y

C = 500 + (0.5)Y S = -500 + (0.5)Y
Practise

No: 1
 Diposable Consumpti APC MPC Savin APS MPS
income on g
(Yd) (C) (S)

0
250
500
750
1000
1250
1500
1750
2000
ving function is S=-150 + 0.35Yd, complete the table abov
ch the AD = AS and Leakage = Injection GRAF
Diposable Consumpti APC MPC Savin APS MPS
income on g
(Yd) (C) (S)

0 150 - 0.65
-150 - 0.35

250 312.5 1.25 0.65
-62.5 -0.25 0.35

500 475 0.95
0.65 25 0.05 0.35

750 637.5 0.85
0.65 112.5 0.15 0.35

1000 800 0.80 200 0.20
0.65 0.35
1250 962.5 0.77 287.5 0.23
1500 1125 0.75 0.65
375 0.25 0.35

1750 1287.5 0.74 0.65
462.5 0.26 0.35

2000 1450 0.73
0.65 550 0.27 0.35

Aggregate Demand
Y=AD
2000
1750 C=150+0.65Yd
1500
1250
1000
750
500
250
150
Income
Leakage/Injection

1500
1000
1250

1750
2000
750
250
500

2000
1750
1500
1250
1000
750
500 S= - 150+0.35Yd
250
Income
- 150
1500
1000
1250

1750
2000
750
250
500

- 250
National Income
Equilibrium
Part 4

Investment (I)
Def:
Investment is a firm expenditure on capital goods
that will be used in the production of goods and services

Devided into :
i. Formation of fixed physical capital
Includes the purchase of machinery, equipment and other items
for use in production and to increase the firm production

ii. Increase in inventory or stock

Includes expenditure to increase stock of row material, semi-
processed goods and final goods that are stored in a warehouse
(before being marketed)
iii. Construction of fixed property
Includes expenditure to build house and other building such as
factories and office building
Def:
Investment is a firm expenditure on capital goods
that will be used in the production of goods and services

Devided into :
i. Formation of fixed physical capital
Includes the purchase of machinery, equipment and other items
for use in production and to increase the firm production

ii. Increase in inventory or stock

Includes expenditure to increase stock of row material, semi-
processed goods and final goods that are stored in a warehouse
(before being marketed)
iii. Construction of fixed property
Includes expenditure to build house and other building such as
factories and office building
Def:
Investment is a firm expenditure on capital goods
that will be used in the production of goods and services

Devided into :
i. Formation of fixed physical capital
Includes the purchase of machinery, equipment and other items
for use in production and to increase the firm production

ii. Increase in inventory or stock

Includes expenditure to increase stock of row material, semi-
processed goods and final goods that are stored in a warehouse
(before being marketed)
iii. Construction of fixed property
Includes expenditure to build house and other building such as
factories and office building
Def:
Investment is a firm expenditure on capital goods
that will be used in the production of goods and services

Devided into :
i. Formation of fixed physical capital
Includes the purchase of machinery, equipment and other items
for use in production and to increase the firm production

ii. Increase in inventory or stock

Includes expenditure to increase stock of row material, semi-
processed goods and final goods that are stored in a warehouse
(before being marketed)
iii. Construction of fixed property
Includes expenditure to build house and other building such as
factories and office building
Type of Investment
Induced Investment
Influence by national income
Investment
I

0 National Income

Autonomous Investment
NOT influence by national income
Investment

I0 I

0 National Income
Practise

No: 2
If INVESTMENT is RM275 million, complete the
table below
Disposable Consumpti Saving Investm AD
income on (S) ent (C+I)
(Yd) (C) (I)
0 150 -150
250 312.5 -62.5
500 475 25
750 637.5 112.5
1000 800 200
1250 962.5 287.5
1500 1125 375
1750 1287.5 462.5
2000 1450 550
 er
s w
n
a Disposable Consumpti Saving Investm AD
income on (S) ent (C+I)
(Yd) (C) (I)
0 150 -150 275 425
250 312.5 -62.5 275 587.5
500 475 25 275 750
750 637.5 112.5 275 912.5
1000 800 200 275 1075
1250 962.5 287.5 275 1237.5
1500 1125 375 275 1400
1750 1287.5 462.5 275 1562.5
2000 1450 550 275 1725
Using your previous Curve from Practise No.1 ,
draw the new AD (C+I) curve and I curve
 r
Aggregate Demand
e
sw 2000
Y=AD

an 1750
1500
1250
C+I
C=150+0.65Yd
1000
750
500
425
250
150
Income

1214.29
Leakage/Injection

1500
750
1000
1250

1750
2000
500
250

2000
1750
1500
1250 S= - 150+0.35Yd
1000
750
500
275 250 I
Income
1214.29

- 150
1500
1000
1250

1750
2000
750
250
500

- 250
National Income Equilibrium
Part 5
(Day 2, Week 5 Day 1, Week 6)

Government Expenditure
(G)
&
Taxes (T fix taxes)
Government Expenditure
funded by tax collection from household and firms
as well as loan from within the country and abroad.
cover the purchase of factors of production from
household and purchase of goods and services from
firms as well as public investment
 Taxes
Main source of government income .
Income (Y) received by the Gov sector through tax
collection and used for various types of expenditures

2 sectors : Y = Yd
National income equal to disposable income because no TAX

3 sectors and 4 sectors : Yd = Y - T

Disposable income is calculated by subtract taxes from
national income
Taxes divided into

Direct Taxes:
Directly imposed on individuals or bodies that are eligible
to be tax.
Tax burden cannot be transferred to other people.
Examples: individual income tax, corporate income tax,
property tax, road tax

Indirect Taxes:
Indirectly imposed on parties that are required to pay
taxes.
Tax burden can be transferred to other parties.
Examples: sales tax, services tax
Effects of tax

Effect on consumption (C), saving (S), and disposable

income (Y).

Tax decrease disposable house income.

Taxes Income Consumption Saving

 Examples
Effect on Consumption (C) and Saving (S) because of

[ FIX TAXES ]
 Consumption function is C = 500+0.5Yd and fixed tax (T) is
RM500 million. Derive the new consumption and saving
function after the effect of fix taxes.

solution
C = 500 + 0.5Yd S = -500 + 0.5Yd
T = 500 T = 500

C = 500 + 0.5(Y-T) S = -500 + 0.5(Y-T)

C = 500 + 0.5(Y-500) S = -500 + 0.5(Y-500)
C = 500 + 0.5Y 250 S = -500 + 0.5Y - 250
C = 500 250 + 0.5Y S = -500-250 + 0.5Y
C = 250 + 0.5Y S = -750 + 0.5Y
Practise

No: 3
 Consumption function is C = 150+0.65Yd and fixed tax (T)
is RM100 million. Derive the new consumption and saving
function after the effect of fix taxes.

solution
C = 150 + 0.65Yd S = -150 + 0.35Yd
T = 100 T = 100
C = 150 + 0.65(Y-T) S = - 150 + 0.35(Y-T)
C = 150 + 0.65(Y-100) S = - 150 + 0.35(Y-100)
C = 150 + 0.65Y 65 S = -150+ 0.35Y - 35
C = 150 65+ 0.65Y S = -150 - 35 + 0.35Y
C = 85 + 0.65Y S = -185+ 0.35Y
If TAXES is RM100 million and GOVERNMENT
EXPENDITURE is RM 165 million, complete the
table below
Y C S I G T AD L I
(C+I+ (S+T (I+G
G) ) )
0 275
250 275
500 275
750 275
1000 275
1250 275
1500 275
1750 275
2000 275
 er
sw
an
Y C S I G T AD L I
(C+I+G (S+T) (I+G
) )
0 85 -185 275 165 100 525 -85 440
250 247.5 -97.5 275 165 100 687.5 2.5 440
500 410 -10 275 165 100 850 90 440
750 572.5 77.5 275 165 100 1013 178 440
1000 735 165 275 165 100 1175 265 440
1250 897.5 253 275 165 100 1338 353 440
1500 1060 340 275 165 100 1500 440 440
1750 1223 428 275 165 100 1663 528 440
2000 1385 515 275 165 100 1825 615 440

ding on the table above, identify the National Income Equili

Using your previous Curve from Practise No.2 ,
draw the new AD (C+I+G) curve and L=I curve
 r
Aggregate Demand
e
sw 2000
Y=AD
C + I + G

an 1750
1500
1250
C+I
C=150+0.65Yd
1000
750
525 500
250
150
Income
Leakage/Injection

1500
750
1000
1250

1750
2000
500
250

2000
1750
1500
1250 S + T
1000 S= - 150+0.35Yd
750
440 500 I+G
250 I
Income
- 85
1500

- 150
1000
1250

1750
2000
750
250
500

- 250
National Income Equilibrium
Part 6
(Day 1, Week 6)

Government Expenditure
(G)
&
Taxes (T induce taxes)
 Examples
Effect on Consumption (C) and Saving (S) because of

[ INDUCE TAXES ]
 Consumption function is C = 500+0.5Yd and induced tax (T)
is 0.1Y. Derive the new consumption and saving function
after the effect of fix taxes.

solution
C = 500 + 0.5Yd S = -500 + 0.5Yd
T = 0.1Y T = 0.1Y

C = 500 + 0.5(Y-T) S = -500 + 0.5(Y-T)

C = 500 + 0.5(Y-0.1Y) S = -500 + 0.5(Y-0.1Y)
C = 500 + 0.5(0.9Y) S = -500 + 0.5(0.9Y)
C = 500 + 0.45Y S = -500 + 0.45Y
Practise

No: 4
 Consumption function is C = 150+0.65Yd and induced tax
(T) is 0.2Y. Derive the new consumption and saving function
after the effect of induce taxes.

solution
C = 150 + 0.65Yd S = -150 + 0.35Yd
T = 0.2Y T = 0.2Y
C = 150 + 0.65Yd(Y-T) S = - 150 + 0.35Yd (Y-T)
C = 150 + 0.65Yd(Y-0.2Y) S = - 150 + 0.35Yd(Y-0.2)
C = 150 + 0.65Y(0.8) S = -150 + 0.35Y(0.8)
C = 150 + 0.52Y S = -150 + 0.28Y
If TAXES is 0.2Y and GOVERNMENT
EXPENDITURE is RM 295 million, complete the
table below
Y C S I G T AD L I
(C+I+ (S+T (I+G
G) ) )
0 275
250 275
500 275
750 275
1000 275
1250 275
1500 275
1750 275
2000 275
 If TAXES is 0.2Y and GOVERNMENT
EXPENDITURE is RM 295 million, complete the
table below
Y C S I G T AD L I
(C+I+G (S+T) (I+G
) )
0 150 -150 275 295 0 720 -150 570
250 280 -80 275 295 50 850 -30 570
500 410 -10 275 295 100 980 90 570
750 540 60 275 295 150 1110 210 570
1000 670 130 275 295 200 1240 330 570
1250 800 200 275 295 250 1370 450 570
1500 930 270 275 295 300 1500 570 570
1750 1060 340 275 295 350 1630 690 570
2000 1190 410 275 295 400 1760 810 570

ding on the table above, identify the National Income Equili

Draw the new AD (C+I+G) curve and L=I curve
using NEW GRAPH PAPER
 r
Aggregate Demand
e
sw 2000
Y=AD

an 1750
1500
1250
C + I + G

1000
750
720
500
250
150
Income
Leakage/Injection

1500
750
1000
1250

1750
2000
500
250

2000
1750
1500 S + T
1250
1000
750
570 500 I+G
250
Income
1500

- 150
1000
1250

1750
2000
750
250
500

- 250
National Income Equilibrium
Part 7
(Day 2, Week 6)

Import(M)
&
Export(X)
Export

SALE of goods and services to foreign countries

INCREASE the national income
Factors influence Export:

Taste of foreign consumer

If foreign consumers prefer to purchase goods from a certain country,
export from that country will increase..but, if not the export from that
country will decrease

National economic situation

Country eco is expanding rapidly, eco productivity will increase, export
will increase. but if not the export will decrease

Foreign exchange rate

Foreign exchange rate decrease, price of the country export will
decrease, demand for goods increase thus the export will increase.
Factors influence Export:

Technological advances
Technology advanced will cause a decrease in production cost in export
Therefore, price of export will drop and the countrys export will increase

Foreign trade policies

IF foreign country practise trade barriers on import so export from that
country will decrease. How ever IF country encourage import so export
from that country will increase
Import

BUY of goods and services from foreign countries

Factors influence Import:

1. National Income
National Income increase so import will increase and v/v

Import (RM million) M0

i1

i0

0 National Income (RM million)

Y0 Y1
Factors influence Import:

2. Foreign trade policies

Drop in a country foreign exchanged rate will cause import price to
increase, therefore demand for import will decline and import decrease

3. Inflation

When inflation, local goods will cost more than import goods. So local
will prefer to buy imported goods

4. Government Policies
If government implement trade barriers, the country import will decrease
Practise

005
Complete table if:
C = 500 + 0.5Yd
T = 500
I = 1000
G = 2250
X = 6500
M = 5000

Y C S T I G X M AD Leaka Injecti
ge on
0
2000
4000
6000
8000
10000
12000
Complete table if:
C = 500 + 0.5Yd
T = 500
I = 1000
G = 2250
X = 6500
M = 5000

Y C S T I G X M AD Leaka Injecti
ge on
0 250 -750 500 1000 2250 6500 5000 5000 4750 9750
2000 1250 250 500 1000 2250 6500 5000 6000 5750 9750
4000 2250 1250 500 1000 2250 6500 5000 7000 6750 9750
6000 3250 2250 500 1000 2250 6500 5000 8000 7750 9750
8000 4250 3250 500 1000 2250 6500 5000 9000 8750 9750
10000 5250 4250 500 1000 2250 6500 5000 10000 9750 9750
12000 6250 5250 500 1000 2250 6500 5000 11000 10750 9750
Practise

No: 5
Export is 650 million and import is 500 million,
complete the table below

Y C S I G X M T AD L I
C+I+G+(X- S+T+ I+G+
M) M X

0 150 -150 275 295 650 500 0

250 280 -80 275 295 650 500 50
500 410 -10 275 295 650 500 100
750 540 60 275 295 650 500 150
1000 670 130 275 295 650 500 200
1250 800 200 275 295 650 500 250
1500 930 270 275 295 650 500 300
1750 1060 340 275 295 650 500 350
2000 1190 410 275 295 650 500 400
Export is 650 million and import is 500 million,
complete the table below

Y C S I G X M T AD L I
C+I+G+(X- S+T+ I+G+
M) M X

0 150 -150 275 295 650 500 0 870 350 1220

250 280 -80 275 295 650 500 50 1000 470 1220
500 410 -10 275 295 650 500 100 1130 590 1220
750 540 60 275 295 650 500 150 1260 710 1220
1000 670 130 275 295 650 500 200 1390 830 1220
1250 800 200 275 295 650 500 250 1520 950 1220
1500 930 270 275 295 650 500 300 1650 1070 1220
1750 1060 340 275 295 650 500 350 1780 1190 1220
2000 1190 410 275 295 650 500 400 1910 1310 1220
 Draw the new AD curve and L=I curve using
THE PREVIOUS GRAPH PAPER on practise 4
 r
Aggregate Demand
e
sw 2000
Y=AD
C + I + G + (X M)

an 1750
1500
1250
Y=C+I+G+(X-M)
Y=150+0.52Y+275+295+(6
870 1000 50-500)
750 Y=870+0.52Y
500 Y-0.52Y=870
250 0.48Y=870
150 Y=870/0.48
Income
Y=1,812.5

1812.5
Leakage/Injection

1500
750
1000
1250

1750
2000
500
250

2000
1750 S + T +M
1500 S+T+M=I+G+X
1250 -
1000 150+0.28Y+0.2Y+500=275+2
I+G+ X +650
750
500 -150+0.48Y=720
350 0.48Y=870
250 Y=870/0.48
Income
1812.5

Y=1,812.5
1000
1250
1500
1750
2000
750
250
500

- 250
Practise

No: 6
C=150+0.75Yd
T=0.2Y
G=200
I=150
X=300
M=0.1Y
(all the figure are in RM billion)

a. Derive new Consumption and Saving Function after tax effect

b. Complete the table
c. Draw the AD Curve and Leakage=Injection Curve
Y C S I G X M T AD L I
C+I+G+(X- S+T+ I+G+
M) M X

250

500

750

1000

1250

1500

1750

2000
National Income Equilibrium
Part 8
(Day 1, Week 7)

Calculate National
Income Equilibrium
Determine National Income Equilibrium

Using Table
Complete table if:
C = 500 + 0.5Yd
T = 500
I = 1000
G = 2250
X = 6500
M = 5000

Y C S T I G X M AD Leaka Injecti
ge on
0 250 -750 500 1000 2250 6500 5000 5000 4750 9750
2000 1250 250 500 1000 2250 6500 5000 6000 5750 9750
4000 2250 1250 500 1000 2250 6500 5000 7000 6750 9750
6000 3250 2250 500 1000 2250 6500 5000 8000 7750 9750
8000 4250 3250 500 1000 2250 6500 5000 9000 8750 9750
10000 5250 4250 500 1000 2250 6500 5000 10000 9750 9750
12000 6250 5250 500 1000 2250 6500 5000 11000 10750 9750
AD = AS

Where AD = C+I+G+ (X-M)

And AS is Y

So Y = C+I+G+ (X-M)

Y C S T I G X M AD Leaka Injecti
ge on
0 250 -750 500 1000 2250 6500 5000 5000 4750 9750
2000 1250 250 500 1000 2250 6500 5000 6000 5750 9750
4000 2250 1250 500 1000 2250 6500 5000 7000 6750 9750
6000 3250 2250 500 1000 2250 6500 5000 8000 7750 9750
8000 4250 3250 500 1000 2250 6500 5000 9000 8750 9750
10000 5250 4250 500 1000 2250 6500 5000 10000 9750 9750
12000 6250 5250 500 1000 2250 6500 5000 11000 10750 9750
Leakage = Injection

Where Leakage is S+T+M

and Injection = I+G+X

So S+T+M = I+G+X

Y C S T I G X M AD Leaka Injecti
ge on
0 250 -750 500 1000 2250 6500 5000 5000 4750 9750
2000 1250 250 500 1000 2250 6500 5000 6000 5750 9750
4000 2250 1250 500 1000 2250 6500 5000 7000 6750 9750
6000 3250 2250 500 1000 2250 6500 5000 8000 7750 9750
8000 4250 3250 500 1000 2250 6500 5000 9000 8750 9750
10000 5250 4250 500 1000 2250 6500 5000 10000 9750 9750
12000 6250 5250 500 1000 2250 6500 5000 11000 10750 9750
Determine National Income Equilibrium

Graph Paper
 AD (C,I,G,X,M) Y = AD
C+I+G+(X-M)

0 Income
?

Leakage=Injection

S+T+M

? I+G+X

0 Income
?
?
 Determine National Income Equilibrium

Using Calculation Method

 Determine National Income Equilibrium

Using Calculation Method

Total Approach (AD=AS)
AD=AS

C = 500 + 0.5Yd
T = 500
I = 1000
G = 2250
X = 6500
M = 5000

National Income Equilibrium:

Y = C+ I + G + (X - M)
Step 1: Derive new consumption function

C = 500 + 0.5Yd
C = 500 + 0.5(Y-T)
C = 500 + 0.5Y 250
C = 500 - 250 + 0.5Y
C = 250 + 0.5Y
Step 2: Calculate National Income Equilibrium

Y = 250 + 0.5Y + 1000 + 2250 + (6500-

5000)
Y= 250 + 1000 + 2250 + 1500 + 0.5Y
Y = 5000 + 0.5Y
Y-0.5Y = 5000
0.5Y = 5000
Y = 5000/0.5
Y = 10,000
 Determine National Income Equilibrium

Using Calculation Method

Leakage = Injection
Leakage = Injection
If C = 500 + 0.5Yd

So S = -500 + 0.5Yd
and

T = 500
I = 1000
G = 2250
X = 6500
M = 5000
Step 1: Derive new saving function

S = -500 + 0.5Yd
T = 500

S = -500 + 0.5(Y-T)
S = -500 + 0.5 (Y-500)
S = -500 + 0.5Y 250
S = -750 + 0.5Y
Step 2: Calculate National Income using

Leakage = Injection
where: S + T + M = I + G + X

and S = -750 + 0.5Y

S + T + M = I + G + X
-750 + 0.5Y + 500 + 5000 = 1000 + 2250 + 6500
0.5Y + 4750 = 9750
0.5Y = 9750 4750
0.5Y = 5000
Y = 5000/0.5
Y = 10,000
Practise

006
If
C = 500 + 0.5Yd
T = 0.2Y
I = 1500
G = 1000
X = 1200
M = 0.1Y

Determine the value for National Income

Equilibrium using:
1. TABLE
2. Aggregate Demand = Aggregate Supply Curve
and Leakage = Injection Curve on GRAPH
PAPER
3. CALCULATION using Aggregate Demand =
Aggregate Supply Approach and Leakage =
 Y C S T I G X M AD Leaka Injecti
ge on
0
2000
4000
6000
8000
10000
12000
National Income Equilibrium is

6000
Practise

No: 7
Q.1: Answer all question below:
(All data in RM million)

C=48+0.8Yd
I=100
G=80
T=10

a. Derive the consumption and saving function after tax (4m)

b. Calculate the national income equilibrium by using
Injection=Leakage Approach (4m)
c. Calculate the total saving at the national income equilibrium. (4 m)

Q.2: Answer all question below:

(All data in RM million)

C=10+0.8Yd
I=23
G=10
T=10
X=15
M=0.3Y

d. Calculate the national income equilibrium by using AD=AS

National Income Equilibrium
Part 9
(Day 2, Week 7)

Circular Flow of Income

 Circular Flow of Income

2 Sector Economy
 (1) Factor of production

(2) Income form factor of production

(6) Investment Financial (5) Saving
FIRM HOUSEHOLD
institution
(4) Consumption expenditure

(3) Good and services

 Circular Flow of Income

3 Sector Economy
 (1) Factor of production

(2) Income form factor of production

(6) Investment Financial (5) Saving
FIRM HOUSEHOLD
institution
(9) Expenditure on goods and services

(8) Payment for factor of production

(4) Consumption expenditure

(7) Taxes
(7) Taxes

(3) Good and services

Government
sector
 Circular Flow of Income

4 Sector Economy
(Open Economy)
 (1) Factor of production

(2) Income form factor of production

(6) Investment Financial (5) Saving
FIRM HOUSEHOLD
institution
(9) Expenditure on goods and services

(8) Payment for factor of production

(4) Consumption expenditure

(7) Taxes
(7) Taxes

(3) Good and services

Government
sector

(10) Export (10) Export

Foreign
sector
(11) Import (11) Import
Finish
Topic

3
Practise

007
True of False Question 1

In a circular flow of income in a two

sector economy, leakage consists of
saving and investment

true / false
True of False Question 1

In a circular flow of income in a two

sector economy, leakage consists of
saving and investment

true / FALSE
True of False Question 2

In a circular flow of income in a three

sector economy, leakage consists of
saving and taxes

true / false
True of False Question 2

In a circular flow of income in a three

sector economy, leakage consists of
saving and taxes

TRUE / false
True of False Question 3

In a circular flow of income in open

economy, leakage consists of saving,
export and taxes

true / false
True of False Question 3

In a circular flow of income in an open

economy, leakage consists of saving,
export and taxes

true / FALSE
True of False Question 4

Based on the leakage-injection

approach, the equilibrium level of output
in an economy is Y = C + I.

true / false
True of False Question 4

Based on the leakage-injection

approach, the equilibrium level of output
in an economy is Y = C + I.

true / FALSE
True of False Question 5

The APC can be measured by dividing

change in consumption with the change
in disposable income

true / false
True of False Question 5

The APC can be measured by dividing

change in consumption with the change
in disposable income

TRUE / false
True of False Question 6

Based on the AD and AS approach, the

equilibrium level of income in an open
economy is Y = C + I + G + Net Export

true / false
True of False Question 6

Based on the AD and AS approach, the

equilibrium level of income in an open
economy is Y = C + I + G + Net Export

TRUE / false
True of False Question 7

Road tax and tax on import are known

as regressive tax because they are
imposed on the value of the goods and
not the income

true / false
True of False Question 7

Road tax and tax on import are known

as regressive tax because they are
imposed on the value of the goods and
not the income

TRUE / false
True of False Question 8

On the progressive tax category, the tax

rate will increase when income increase

true / false
True of False Question 8

On the progressive tax category, the tax

rate will increase when income increase

TRUE / false
True of False Question 9

Government expenditure is considered

leakage in the circular flow of national
income.

true / false
True of False Question 9

Government expenditure is considered

leakage in the circular flow of national
income.

true / FALSE
True of False Question 10

National Income Equilibrium will be

achieved when consumption plus
government expenditure is equal to
saving plus taxes.

true / false
True of False Question 10

National Income Equilibrium will be

achieved when consumption plus
government expenditure is equal to
saving plus taxes.

true / FALSE
The

END