2.4

Question 1

Explain whats meant by the circular flow of income

Answer 1

A way of analysisng the flows of money around an economy between households and firms
It accounts for injections that increase the circular flow of income (investment gov spending exports)
It also accounts for withdrawls that decrease the circular of income (saving taxation imports)

Question 2

Explain the difference between income and wealth

Answer 2

Income is what you earn, wealth is the value of what you own

Question 3

Define the multipier effect

Answer 3

The process by which a change in an interjection (gov expenditure, investment or exports) causes a more than proportionate change in national income

Question 4

Whats the multiplier formula

Answer 4

k=1/1-mpc

Question 5

Define th term ‘marginal propensity to consume’ MPC +formula

Answer 5

The proportion of an increase in income thats spent
MPC= change in concumption (C) / change in income (Y)

Question 6

Explain how changes in the MPC will affect the multiplier

Answer 6

The higher the value of the MPC, the higher will be the value of the multiplier and consequently the greater will be the impact of an interjection on GDP. Using the MPC, the multiplier is calculated by K= 1/1-mpc

Question 7

Defince the term ‘marginal propensity to save’ MPS

Answer 7

The proportion of an increase in income thats saved
MPS= change in Saving/ Change in income (s/Y)

Question 8

Define the term marginal propensity to tax MPT

Answer 8

The proportion of an increase in income thats taxed
MPT= change in tax/ chnage in income (T/Y)

Question 9

Define the term marginal propensity to import MPM
+equation

Answer 9

The proportion of an increase in income that is spent on imports
MPM= change in imports/ change in income (M/Y)

Question 10

Define the term marginal propensity to withdraw MPW

Answer 10

The proportion of an increase in income that is spent on withdrawls
MPW= Change in withdrawls/ change in income (W/Y)

Question 11

Explain how MPW, MPS, MPT and MPM will affect the multiplier

Answer 11

The higher the vale of the MP, the lower the value of the multiplier. This means that any change in an injection has a smaller impact on the overall level of spending
K=1/1-MPW fore example

Question 12

What is an interjection + 3 examples

Answer 12

Injection into the circular flow is spending which does not come from households
Investment, Gov spending and exports

Question 13

How does investment increase the circular flow of income? + What might lead to a rise in the amount of each injection?

Answer 13

Spending by businesses on capital
Investment creates jobs and provides incomes for households to spend

Higher profits (eg lower corp tax)
Lower interest rates
Greater business confidence

Question 14

How does Gov spending increase the circular flow of income? + What might lead to a rise in the amount of each injection?

Answer 14

Spending by central + local gov
Gov spending can be transfers (like benefits) which creates spending power for households. It can also be spent on education, healthcare ect creating jobs

Expansionary Fiscal policy
A shift from a more free market Gov to a more interventionist Gov

Question 15

How does exports increase the circular flow of income? + What might lead to a rise in the amount of each injection?

Answer 15

Spending by foreign consumers on domestic goods+ services + extra spending on domestic goods created greater profits + requires greater production levels which creates jobs

£weaker
Uk more competitive/ more desireable
Low inflatiom

Question 16

How does saving reduce the circular flow of income? + What might lead to a rise in the amount of each withdrawal?

Answer 16

Money which isn’t spent by households
Saving reduces the amount of money spent by households- this reduces revenues/ profits for firms

Higher interest rates
Lower consumer confidence

Question 17

How does taxation reduce the circular flow of income? + What might lead to a rise in the amount of each withdrawal?

Answer 17

Paid to the gov by households + firms
Taxation removes money from circular flow of income - income tax reduces disposable income whilst corporation tax reduces net profits

An aim to reduce a budget deficit might involve higher taxes
A shift from a more free market government to a more interventionist government is likely to increase taxation (but also spending)

Question 18

How does imports reduce the circular flow of income? + What might lead to a rise in the amount of each withdrawal?

Answer 18

Spending by households + firms on goods + services from abroad.
Money spent leaves the domestic flow of income

Less tarifs + trade barriers
If UK is less competitive (UK has high inflation)

Question 19

Explain how the multiplier effect can have an impact on the future GDP of an economy

Answer 19

One persons spending becomes another persons income. When the Gov increase spending that money becomes public service workers income. This was respent to become revenue for businesses ect, the respending only stopped when it leaked out from taxes, savings and imports

Question 20

Explain how a negative multiplier effect could lead to a ‘downward spiral’ for an economy

Answer 20

When there is more withdrawels, there is less spending thus less revenue which leads to less jobs in the ecconomy thus causing further less spending.