2.4 national income Flashcards
define the circular flow of income
flow of money between households and firms, the cyclical nature of the flow of money around the economy
define income
the money you get in from work
define wealth
the ownership of goods, assets, land & factories
what might be the impact of injections into the circular flow of income & how might this present
increases the circular flow of income
increases in exports, investment & govt spending
what might be the impact of withdrawals from the circular flow of income & how might this present
reduce the circular flow of income
increases in savings, taxes or imports
define quantitative easing
printing more money to inject money into the economy
explain concept of equilibrium real national output
When injections and withdrawals are equal, there is equilibrium in the economy.
multiplier formula
k = 1/ MPW = 1/ (1-MPC)
define the multiplier effect
when an initial injection into the economy causes a larger final increase in the level of real national income/output.
what is the marginal propensity to consume & its effect on the multiplier
MPC- proportion of a change in income will be spent on consumption rather than being saved
what is the marginal propensity to save& its effect on the multiplier
MPS
If interest rates are high, then consumption may not rise significantly as additional income may be saved rather than spent
what is the marginal propensity to tax & its effect on the multiplier
MPT
Taxes are a withdrawal from the circular flow, if tax rates are high then consumers will be deterred from spending
what is the marginal propensity to import & its effect on the multiplier
MPM
If we receive increases in disposable income, but this is spent on imported goods, then this would count as a withdrawal or leakage from the circular flow of income and national income would not rise as much as anticipated
how does the multiplier look on an AD graph
shift to the right
