(a)

An increase in autonomous consumption expenditure directly increases aggregate demand (AD). This is because autonomous consumption is a component of AD (AD = C + I + G + NX). An increase in C will lead to an immediate increase in AD.

(b)

The multiplier is calculated as 1 / (1 - MPC). In this case, MPC = 0.75.

Multiplier = 1 / (1 - 0.75) = 1 / 0.25 = 4

The change in aggregate demand is the multiplier multiplied by the change in autonomous consumption.

Change in AD = 4 * £10 billion = £40 billion

Therefore, the change in aggregate demand is £40 billion.

(c)

An increase in autonomous consumption is generally considered a desirable policy for a government because of the multiplier effect. The multiplier amplifies the initial change in autonomous consumption, leading to a larger overall increase in aggregate demand and economic output. This can stimulate economic growth, reduce unemployment, and increase national income. However, there are potential drawbacks.

• Inflation: If the economy is already operating near full capacity, an increase in AD could lead to inflation. Increased demand without a corresponding increase in supply will push prices up.
• Government Debt: Financing an increase in autonomous consumption (e.g., through government borrowing) can lead to an increase in government debt. This can have long-term economic consequences.
• Crowding Out: If the government borrows to finance the increase in consumption, it can 'crowd out' private investment by increasing interest rates.

Therefore, while the multiplier effect suggests a positive impact, governments must carefully consider the potential risks and trade-offs before implementing policies aimed at increasing autonomous consumption.

Calculation:

1. Change in autonomous consumption (AD): £5 billion
2. Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4
3. Maximum increase in national income = Multiplier x Change in AD = 4 x £5 billion = £20 billion

Explanation: A tax cut directly increases autonomous consumption expenditure. This leads to an initial increase in aggregate demand. The multiplier effect amplifies this initial change, resulting in a larger increase in national income. The MPC of 0.75 indicates that 75% of each additional income is spent, leading to further rounds of expenditure and income generation.

Introduction: This question requires an evaluation of the effects of increased social welfare spending. It's important to consider the potential impacts on aggregate demand, labour supply, and the overall economy. A clear understanding of economic principles is essential.

Potential Benefits:

• Increased Aggregate Demand: Increased social welfare payments directly boost aggregate demand, as recipients spend their income on goods and services. This is particularly effective during economic downturns.
• Reduced Poverty and Inequality: Social welfare programs can reduce poverty and income inequality, leading to improved social cohesion and potentially higher levels of human capital.
• Improved Health and Education: Some social welfare programs (e.g., healthcare, education subsidies) can improve health and educational outcomes, leading to a more productive workforce in the long run.
• Automatic Stabiliser: Unemployment benefits act as an automatic stabiliser during recessions, cushioning the impact of falling incomes and preventing a sharp decline in aggregate demand.

Potential Drawbacks:

• Reduced Labour Supply: Generous social welfare benefits may disincentivise some people from seeking employment, reducing the labour supply. This is a key concern for policymakers.
• Increased Government Debt: Increased spending on social welfare programs can lead to higher government debt, which can have negative long-term consequences for the economy.
• Inflation: If the increased demand generated by social welfare spending exceeds the economy's capacity to produce goods and services, it could lead to inflation.
• Administrative Costs: Administering social welfare programs can be costly, diverting resources from other priorities.
• Moral Hazard: Some argue that social welfare programs can create a moral hazard, encouraging irresponsible behaviour.

Conclusion: Increased government spending on social welfare programs can provide significant benefits in terms of reducing poverty, boosting aggregate demand, and improving social outcomes. However, policymakers must carefully consider the potential drawbacks, including reduced labour supply, increased government debt, and inflationary pressures. The optimal level of social welfare spending is a complex issue that depends on a variety of factors, including the specific design of the programs, the state of the economy, and the values of society.