Question

20 MARKS QUESTION S How would inflation affect a retired teacher who receives a fixed pension monthly? 12 1 2. The table below gives information on changes in disposable income and the corresponding changes in consumption. Net Saving Disposable Consumption (C) MPC Income (Y) 250 250 350 300 500 390 470 600 a) Copy the table into your examination book and indicate the values of the marginal propensity to consume (MPC) and net saving. [8) 3. Use a diagram to illustrate a situation where the equilibrium income in an economy exceeds the full employment income. State the problem that is being experienced and explain the fiscal measures that may be implemented eliminate the problem. 10) TOTAL 100 MARKS

Answer 1

1. Inflation means increase in the price of goods and services over a period of time. There are 2 basic terms Nominal and Real income. The former means income at current price while the latter means income with adjusted inflation. A teacher who must have retired a few years ago and is now currently receiving pension is receiving pension in the nominal terms which might appear lucrative but in the actual sense the value of the pension has reduced due to inflation, it thus reduces the purchasing power of the individual.

2.

Disposable Income (Y)	Consumption (C )	MPC	Net Saving
250	250	1.00	0
350	300	0.86	50
500	390	0.78	110
600	470	0.78	130

3.

Equilibrium of Consumption and Income Disposable Income (Y) Consumption (C)

At the initial level where income = expenditure is the full employment situation and after that there is the situation of deflationary gap; it is the situation where the income is greater than the expenditure. Fiscal measures to solve the problem is to increase expenditure through deficit budgeting, reduce tax rate, borrowing etc.