An economy has 3 leakages from the circular flow. The marginal propensity to save = 0.17, the marginal propensity to import = 0.23 and the marginal tax rate = 0.4. The government rises spending by £300 million, what is the final change in national income?
Multiplier = 1/sum of leakages = 1/(0.17+0.23+0.4)= 1/0.8 = 1.25Government increases spending by £300 million. Therefore, the change in national income = 1.25 x £300 = £375 million
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