10.1 The Circular Flow Of Income

Question 1

What does national income measure?

Answer 1

Flow of net output produced by an economy in a particular time period such as a year

Question 2

What is the difference between nominal and real national income?

Answer 2

The flow of new output is real national income which comprises the actual goods and services that are produced, by contrast nominal national income measures the flow of output at the current price level in the economy

Question 3

What is the role of real national income as an indicator of economic performance?

Answer 3

The level of real national income is an indicator of current living standards within the economy and it’s rare of change measures the economic growth occurring in the economy. The level and rate of change of real national income are used when comparing a countries economic performance with other countries

Question 4

National income=

Answer 4

National output=national expenditure

Question 5

How many methods are used to measure the flow or new output in an economy?

Answer 5

3

Question 6

What are the 3 methods are used to measure the flow or new output in an economy?

Answer 6

1. Adding together incomes received by different factors of production (income approach)
2. Summing the totals of actual goods and services produced by the economy (output approach)
3. Messier national expenditure(expenditure approach)

Question 7

What is the estimate of gdp based on?

Answer 7

The output approach to measuring the flow of new output

Question 8

What is a closed economy?

Answer 8

An economy with no international trade

Question 9

What do households do in the supply of labour?

Answer 9

Supply labour and purchase goods

Question 10

What are savings?

Answer 10

Incomes that aren’t spent

Question 11

What is withdrawal?

Answer 11

Leakage of spending power out of the circular flow of income into savings, taxation or imports

Question 12

What is investment

Answer 12

Total planned spending by firms on capital goods produced in the economy

Question 13

What is injection?

Answer 13

Spending entering the circular flow of income as a result of investment gov spending and exports

Question 14

What is equilibrium national income ?

Answer 14

Level of income at which withdrawals from the circular flow of income equal injections into the flow ; also the level of output at which AS=AD

Question 15

What is full employment income?

Answer 15

The level of income when the economy is producing on its PPF with no spare capacity

Question 16

What does savings to do AD

Answer 16

Lead to deficient AD-firms reduce output and national income falls

Question 16

Is equilibrium national income the same as full employment income ?

Answer 16

No

Question 17

How does savings in bank not lead to reduced AD and real national income

Answer 17

Planned savings May equal planned investment

National income remains in equilibrium and there is no reason why the price level should fall

Question 18

In the two-sector circular flow model when is national income equilibrium achieved

Answer 18

Planned savings =planned investment

Question 19

What is an open economy

Answer 19

An economy open to international trade

Question 20

What are injections in the economy

Answer 20

Exports
Gov spending
Investment

Question 21

What are withdrawals in the economy

Answer 21

Saving
Taxation
Imports

Question 22

What happens to national income level when withdrawals> injections

Answer 22

National income falls

Question 23

What happens to national income level when Withdrawals< injections

Answer 23

National income rises

Question 24

What is the risk if planned savings > planned investment

Answer 24

Economy could sink into a recession

Question 25

What do free market economists think about deficient AD?

Answer 25

Only exists as a temporary self-correcting phenomenon

They are that when it occurs the rate of interest falls restoring equality between savings and investment

Question 26

What does the Philips machine do?

Answer 26

Can predict the running of the national economy within 4% accuracy