topic 3-NIE

Question 1

What is National Income Equilibrium?

Answer 1

A situation when total output (AS) is equal to total expenditure (AD)

AS = AD or Y = AE

Question 2

What indicates a Disequilibrium of National Income?

Answer 2

A situation when:
* total expenditure exceeds total output (AE@AD > Y@AS)
* total expenditure is less than total output (AE@AD < Y@AS)

Question 3

What is Aggregate Demand?

Answer 3

The total demand/expenditure for goods and services in the economy.

Question 4

List the four components of Aggregate Demand.

Answer 4

• Household consumption (C)
• Firm’s private investment (I)
• Government expenditure (Gs)
• Net exports (X-M)

Question 5

According to Keynesian economy, what are the approaches to determine NI Equilibrium?

Answer 5

Output Approach and Injection-Leakage Approach.

Question 6

What is the equation for the Output Approach in a four-sector economy?

Answer 6

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

Question 7

What does Injection equal in the Injection-Leakage Approach?

Answer 7

Leakage.

Question 8

What is the equation for breakeven in the Injection-Leakage Approach?

Answer 8

0 = S.

Question 9

Define the Consumption and Saving Schedule.

Answer 9

It shows the planned consumption and planned saving at various levels of disposable income.

Question 10

What are the two types of consumption?

Answer 10

• Autonomous consumption
• Planned or induced consumption

Question 11

What is Autonomous consumption?

Answer 11

Consumption when household does not have any income (Y = 0).

Question 12

What is the formula for the Average Propensity to Consume (APC)?

Answer 12

APC = C / Yd

Question 13

What is the Marginal Propensity to Consume (MPC)?

Answer 13

A ratio of a change in consumption to a change in income, MPC = ∆C / ∆Yd.

Question 14

What is the equation for the Consumption Function?

Answer 14

C = a + bYd

Question 15

What does the Saving Function represent?

Answer 15

It is a mathematical relationship between saving and disposable income.

Question 16

What is the equation for the Saving Function?

Answer 16

S = -a + (1-b)Yd

Question 17

What is the point of break-even income?

Answer 17

The level at which households consume all their incomes.

Question 18

What happens when Yd is less than RM200?

Answer 18

C > Yd, indicating dissaving.

Question 19

What are the non-income determinants of consumption?

Answer 19

• Distribution of wealth
• Price and wage levels
• Changes in consumers’ taste and fashion
• Change in expectations

Question 20

What are the two types of investment?

Answer 20

• Autonomous Investment
• Induced Investment

Question 21

What is Autonomous Investment?

Answer 21

The amount is fixed and not affected by income.

Question 22

What is the relationship between national income and Induced Investment?

Answer 22

As income rises, the level of investment also increases.

Question 23

What must Islamic investments comply with?

Answer 23

Shariah compliance.

Question 24

What is the formula for the multiplier?

Answer 24

k = ∆Y / ∆AD

Question 25

What is an Inflationary Gap?

Answer 25

A situation where the actual national income (Ye) exceeds the full employment national income (Yf).

Question 26

What is a Deflationary Gap?

Answer 26

A situation where the actual national income (Ye) falls short of the full employment national income (Yf).

Question 27

What adjustments are needed to find C and S with tax in three and four sector economies?

Answer 27

Adjust the C and S function with tax first, then substitute Y equilibrium.