Economics – The circular flow of income | e-Consult
The circular flow of income (1 questions)
Calculation of Induced Saving:
Induced saving (Si) = MPC * (National Income - Disposable Income)
Disposable Income = National Income - Taxes
Assuming taxes are zero for simplicity in this question, Disposable Income = National Income.
Therefore, Si = 0.8 * (National Income - National Income) = 0.8 * 0 = £0 billion.
However, this is incorrect. The formula for induced saving is Si = MPC * (Y - T), where T is taxes. Since taxes are not specified, we assume they are zero. Therefore, Si = 0.8 * (1000 - 0) = £800 billion.
Relationship between MPC and the slope of the induced saving curve:
The MPC is the coefficient on the national income term in the induced saving function. The induced saving curve is a positive-sloping line because the MPC is positive. This means that as national income increases, induced saving increases proportionally to the MPC. A higher MPC results in a steeper positive-sloping curve, indicating a stronger relationship between national income and saving.