2:3:1 - National Income

Question 1

Describe the circular flow of income model.

Answer 1

– Just households and firms in the economy – households own all the factors of production (land, labour, capital and enterprise)And the firms are producers Money moves from households to firms when goods and services are bought. – Money moves back to household as payment for the use of factors of production.

Question 2

What is meant by the term circular flow of income?

Answer 2

Money circulates from households to firms and back again.

Question 3

What increases the amount of income in the circular flow?

Answer 3

– The more that household spend – the more the firms produce

Question 4

What is meant by the term wealth?

Answer 4

Is the sum of all the assets in the economy

Question 5

In the UK what is most wealth held as?

Answer 5

The form of housing (60%)

Question 6

Wealth is a stock concept, what does this mean?

Answer 6

– Means the wealth does not have a direct impact on circular flow of income, but changes in wealth have an affect on incomes and spending.

Question 7

What is meant by the term wealth affect?

Answer 7

The effect on incomes or spending when asset values change

Question 8

Is income flow concept?

Answer 8

Yes

Question 9

How can the wealth affect and the circular flow of income be linked?

Answer 9

If an asset increases in value you might feel more confident about spending in the economy (the world affect) and your Increased spending all then become part of the circular flow of income

Question 10

What are the three different types of injections into the circular flow of income called?

Answer 10

– Investment (I) – government spending (C) – exports (X)

Question 11

The three different types of injections into the circular flow of income can be magnified by what?

Answer 11

Multiplier

Question 12

What is meant by the term injections?

Answer 12

Flows into the circular flow of income.

Question 13

What is meant by the term withdrawls ?

Answer 13

Flows out of the circular flow of income

Question 14

What can withdrawals from the circular flow of income also be called?

Answer 14

Leakages

Question 15

What are the three different types of withdrawals from the circular flow of income?

Answer 15

– Savings (S) – tax (T) – import (M)

Question 16

How does saving affect the circular flow of income?

Answer 16

Saving means there is less money in the economy

Question 17

How does tax affect the circular flow of income?

Answer 17

The government takes money away from the economy in the form of tax, And does not spend it there is less money in the circular flow.

Question 18

How does imports affect the circular flow of income?

Answer 18

If people buy more things from abroad and they export economy slows down as many leaves the circular flow

Question 19

The three withdrawals (leakages effectively determine the size of what?

Answer 19

The multiplier

Question 20

If all the injections equal all the withdrawals (leakages) then the economy will be in what?

Answer 20

Equilibrium

Question 21

If injections are greater than with drawers (leakages the economy will what?

Answer 21

Economy will grow

Question 22

If leakages (with drawls are greater than injections the economy will what?

Answer 22

Economy will contract

Question 23

When aggregate demand meets aggregate supply there is what?

Answer 23

And equilibrium point

Question 24

When aggregate demand meets aggregate supply there is an equilibrium point, what does this equilibrium point tell us?

Answer 24

Tells us the price level and real GDP of the country

Question 25

Prices were higher than the new equilibrium (Where I can get demand equals aggregate supply) there would be a tendency for what?

Answer 25

There would be a tendency for prices therefore because supply will be greater than demand and there would be lots of unsold goods and services

Question 26

If prices were lower than the new equilibrium (when a good demand equals aggregate supply) there would be what?

Answer 26

– I would be shortages – Prices would start to rise, rules of supply and demand

Question 27

What is meant by the term multiplier ratio (multiply)?

Answer 27

when an initial injection into the economy causes a bigger final increase in national income.

Question 28

What is the most important factor in determining the size of the multiplier?

Answer 28

The size of the withdrawals from the circular flow - what proportion of the additional income is saved by households - What proportion is spent on imported goods - What proportion is paid to the government in the form of taxation

Question 29

The multiplier is inversely proportional to what?

Answer 29

The marginal propensity to withdraw (MPW)

Question 30

Because the Multiplier is inversely proportional to the Marginal propensity to withdraw, the equation for the multiplier is…

Answer 30

1 / MPW

Question 31

What is meant by the term marginal propensity to withdraw (MPW)?

Answer 31

A measure of how much of any extra pound earned is saved, taxed or spent outside the economy

Question 32

How can you calculate the marginal propensity to withdraw (MPW)?

Answer 32

Marginal propensity to save (MPS) + Marginal propensity to tax (MPT) + Marginal propensity to import (MPM)

Question 33

How can the formula for the multiplier also be written as? (Including MPC)

Answer 33

1/(1 - MPC)

Question 34

What does MPC stand for

Answer 34

Marginal propensity to consume

Question 35

What is the importance of the multiplier?

Answer 35

– If there is any change in spending in an economy – final impact on incomes will be greater than the initial impact

Question 36

What happens to the multiplier when leakages from economy occur?

Answer 36

Smaller Multiplier

Question 37

What is the size of the multiplier in the UK?

Answer 37

1.4

Question 38

Is the size of the multiplier in developing countries greater than the multiplier in the UK?

Answer 38

Yes

Question 39

How will a large value of the multiplier affect aggregate demand?

Answer 39

It will cause greater shift in aggregate demand

Question 40

What is meant by the term marginal propensity to consume (MPC)?

Answer 40

how much of any extra pound earned is spent within the economy

Question 41

Diagram showing the circular flow of income.

Answer 41