2.4 AND 2.5

Question 1

what is meant by the circular flow of income

Answer 1

it shows how different sectors of the economy link together, e.g. how workers are employed by firms, and there is a wage flow from the firms to the workers, and a flow from the worker to the firm in terms of labour supplied

Question 2

draw the circular flow of income on a diagram, showing:

• flow of money and real resources between firms and households
• the leakages/withdrawals and injections

Answer 2

• household on bottom - arrow going up to firms on right
• firms on top - arrow going down to household on left
• leakages on left
• injections on right

Question 3

define the multiplier

Answer 3

when the final increase in spending in an economy is bigger than the original injection that caused it

Question 4

what is the formula for the multiplier

Answer 4

1 1
_____. or __________
1 - MPC MPW

MPW = MPS + MPT + MPM

Question 5

define marginal propensity to consume

Answer 5

the proportion of additional income that is spent

Question 6

define marginal propensity to save

Answer 6

the proportion of additional income that is saved

Question 7

what is the value of the multiplier when the MPC is 0.9

Answer 7

1/(1-0.9) = 1/0.1 = 10

Question 8

what happens to the value of the multiplier if the MPS increases?

Answer 8

as the MPS increases the value of the multiplier decreases as less of the additional income will be spent in each round of spending

Question 9

if the value of the injection is £50 million, and the MPC is 0.8, what is the final increase in real output?

Answer 9

1/(1-0.8) = 5

5 x 50 = £250 million

Question 10

explain using a diagram the impact of investment on economic growth

Answer 10

in the short run, investment increases AD which means more output. in the long run, an increase in investment increases the quantity of capital, and so increases the productive potential of the economy. shown by a shift to the right of the LRAS curve (full vertical line).

Question 11

explain using a diagram the impact of innovation or technology improvements on economic growth

Answer 11

innovation/improvement in technology can increase the quality and quantity of capital, and increases the productivity of labour, which therefore increases productive potential and so econ growth increases. LRAS 1 > LRAS 2

Question 12

explain how migration affects economic growth

Answer 12

with more migrants, there is a bigger labour pool. which means more people can be employed, and more people with income means more people spending in the economy. consumption increases and so economic growth rises. also, more quantity of labour, so productive potential increases

Question 13

explain how improvements in the education or health service would affect economic growth

Answer 13

improvements in education means improved quality of labour. this can mean when workers are employed productive potential increases and therefore firms increase production, which means more output, so more revenue for the firm, and so higher economic growth

Question 14

explain how changes in the birth rates would affect economic growth

Answer 14

if the birth rates are high this means that there will have to be more spending in the economy to accustom for this. for example, buying bigger houses, buying toys for children etc. this means more consumption and so economic growth increases. and vice versa.

Question 15

explain how an increase in exports might affect economic growth

Answer 15

AD will be increased in the short run and this causes economic growth. in the long run, exports increasing may incentivise firms to invest more to satisfy overseas demands, leading to an increase in capital in the economy, and therefore long run econ growth

Question 16

explain how an instability of government would affect economic growth

Answer 16

if governments are stable/predictable then firms feel more confident about the future, and increased investment leads to increased investment and so there is a rise in economic growth

Question 17

explain how a credit crunch or reduced access to finance might affect economic growth

Answer 17

investment decreases, so economic growth decreases in both the long and short run.

Question 18

distinguish between actual and potential economic growth

Answer 18

actual economic growth is the change in GDP over time. potential economic growth measures how much the economy could produce if all factors of production were fully and efficiently employed

Question 19

give five examples of events that would increase AD or SRAS, and hence increase actual economic growth

Answer 19

1. decrease in wages
2. increase in business confidence
3. decrease in interest rates
4. decrease in energy costs
5. decrease in VAT

Question 20

give five examples of events that would increase LRAS and increase potential economic growth

Answer 20

1. improvements in education
2. increased no. of apprenticeship schemes
3. improvement in technology
4. increased incentive to work
5. decrease in corporation tax that results in an increase in investment

Question 21

draw a diagram to illustrate the economic cycle

Answer 21

diagram in notes for 2.4/2.5

Question 22

illustrate the difference between actual and potential economic growth. mark on the diagram a positive and negative output gap

Answer 22

diagram in notes for 2.4/2.5

Question 23

define a positive output gap

Answer 23

where actual output > potential output

Question 24

define a negative output gap

Answer 24

where potential output > actual output

Question 25

what might you observe in an economy where there is a negative output gap?

Answer 25

this is a recessionary gap, so there would be unemployment, falling price level and low/negative economic growth. there will be spare capacity in the economy so investment might also be low as well as negative real wage increases

Question 26

what might you observe in an economy where there is a positive output gap?

Answer 26

this is an inflationary gap, so high inflation rates, very low unemployment, high economic growth, high investment and large real wage increases

Question 27

how does economic growth benefit a countries citizens?

Answer 27

• increases in living standards through low unemployment
• reduced poverty
• increased tax revenue can be spent on projects such as school, health
• can benefit the environment if there is more investment in to greener technology

Question 28

how does economic growth benefit a countries businesses

Answer 28

• more demand for their goods and services so more revenue/profit
• may attract investment from abroad
• improved confidence so increased investment and growth

Question 29

how does economic growth benefit a countries government?

Answer 29

• increased economic activity increases tax revenue which can reduce a budget deficit, or allow the government to spend more
• a government is more likely to be re-elected when there is economic growth

Question 30

does an increase in income necessarily increase standards of living?

Answer 30

no, if the income is not evenly distributed, or if increased economic activity creates more pollution or congestion

Question 31

name four disadvantages of economic growth

Answer 31

• environmental impact (eg pollution, depletion of resources)
• increasing inequalities in income and wealth
• inflation risk
• species extinction

Question 32

is economic growth desirable?

Answer 32

if economic growth is sustainable and evenly distributed then it is more likely to be desirable

Question 33

what does it depend on?

Answer 33

it depends on how economic growth is achieved. if it is achieved by burning fossil fuels, over fishing, using natural resources at an unsustainable rate then it is likely that economic growth will have serious disadvantages.

Question 34

how do you measure the advantages and disadvantages of economic growth

Answer 34

you can complete a cost benefit analysis that attempts to quantify the costs and benefits of growth

Question 35

how does this change over time?

Answer 35

population will change, as well as environmental issues which means that the cost benefit analysis will need to be kept updated