2.4 NATIONAL INCOME

Question 1

i. What is the circular flow of income?

Answer 1

A model of the economy in which the major exchange represented as flows of moneyy, goods and services, etc, between economic agents

Question 2

iii. What is the difference between income and wealth?

Answer 2

wealth is the net worth of a household, whereas income is what is reported on an income tax return

Question 3

iv. What is the opportunity cost of accumulating wealth?

Answer 3

-consumer spending

Question 4

v. Under what circumstances would increases in income result in an increase in wealth?

Answer 4

increased wages

Question 5

vi. Under what circumstances would increases in wealth result in an increase in income?

Answer 5

-an increase in demand

Question 6

vii. What is the opportunity cost of increased future wealth?

Answer 6

-consumer spending

Question 7

i. What is an injection?

Answer 7

-the introduction of income into the circular flow of income

Question 8

ii. Give 3 injections

Answer 8

-investment

-government spending

-exports

Question 9

iii. What is a withdrawal?

Answer 9

-variables that leak out of the circular flow of income

Question 10

iv. Give 3 withdrawals

Answer 10

-savings

-taxations

-imports

Question 11

v. What happens when injections are bigger than withdrawals (i.e we have net injections)?

Answer 11

A rise in GDP and the value of the multiplier will increase

Question 12

vi. What happens when withdrawals are bigger than injections (i.e we have net withdrawals)?

Answer 12

-National income and inflation will fall

Question 13

vii. What happens when withdrawals = injections?

Answer 13

-Thecircular flow of incomefor a nation is said to be balanced when withdrawals equal injections

Question 14

i. What condition must be achieved for real national output to be in equilibrium?

Answer 14

-the total planned expenditure on output equals the quantity of goods and services firms are willing and able to supply

Question 15

ii. What are the axes on a AS-AD graph?

Answer 15

-Price level and real GDP

Question 16

i. The multiplier is a ratio but what is a ratio between?

Answer 16

-The rise of national income to the initial rise in AD

Question 17

Multiplier

Answer 17

Process by which any changes in the component of aggregate demand will lead to an even greater change in national output

(leads to a cycle of more income and more spending)

Question 18

ix. Give the two formulae for the multiplier

Answer 18

1/1-Marginal propensity to consume = 1/Marginal propensity to withdraw

Question 19

iv. What is the MPS?

Answer 19

-the marginal propensity to save (MPS) refers to the proportion of an aggregate raise in income that a consumer saves rather than spends on the consumption of goods and services

Question 20

v. What is the MPC?

Answer 20

-Marginal propensity to consume
(MPC) is the proportion of a raise that is spent on the consumption of goods and services, as opposed to being saved

Question 21

vi. What is the MPM?

Answer 21

-Themarginal propensity to import(MPM) isthe amount imports increase or decrease with each unit rise or decline in disposable income

Question 22

vii. What is the MPT?

Answer 22

-Themodern portfolio theory(MPT) isa practical method for selecting investments in order to maximize their overall returns within an acceptable level of risk

Question 23

viii. What is MPW?

Answer 23

-Marginal propensity to withdraw MPW isthe extra income that is withdrawn from the circular flow