2..4 National Income

Question 1

what is the most basic circular flow of income

Answer 1

this is the idea that the economy is two sector with just the house holds and firms

Question 2

what is the process by which the income between households and firms flows

Answer 2

households own all the wealth and resources so provide the firms with land, labour and capital in return for rent, wages, interst and profits. This money is then used to buy goods and services so the cycle restarts

Question 3

which factors would need to added to the basic model of the economy to make it more reaslitic

Answer 3

the goverment needs to be added, with money removed to taxation and placed back in through goverment expenditure.

finanical services who can inject money into the system through investment, and take money away when producers or consumers save

foreign markets are added as foreigners buy British goods so exports ​and add money to the flow, but, British people want to buy foreign goods so ​imports take money away from the flow.

Question 4

what are some examples of injections into the economy

Answer 4

goverment spending
investment
exports

Question 5

what are some expamples of withdrawals from the economy

Answer 5

taxes
saving
imports

Question 6

what is the equlibrium level of national output

Answer 6

this is where AD and AS curves inerescet. If either AS or AD are shifted, then the equilibrium position will change.

Question 7

how can investment effect both AS and AD

Answer 7

an increase in investment is will increase AD as it is a component of A, but will also increase AS as firms can produce more with more machines and money.

Question 8

what are injections to the economy

Answer 8

Injections are monetary additions to the economy:
o government spending (G),
o investment (I)
o exports (X).

Question 9

what are withdrawls from the economy

Answer 9

Withdrawals or leakages are where money is removed from the economy:
o taxes (T)
o savings (S)
o imports (M).

Question 10

what is equilubrium within the economy

Answer 10

an equilibrium, injections must be equal to withdrawals and so the national income remains the same.

Question 11

what is the idea behind the multiplier process

Answer 11

the idea that an increase in AD because of an ​increased injection ​(exports, government spending or investment) can lead to a ​further increase in national income.

Question 12

how does the multiplier effect work

Answer 12

It is the ratio of ​the final change in income to the initial change in injection​; and the figure multiplied by the original injection to find the final change in income.

Question 13

what determines the size of a multiplier

Answer 13

The size of the multiplier will be determined by how much of an increase in income people will spend, ​the marginal propensity to consume (MPC). The lower the leakages, the higher the MPC, the bigger the multiplier.

Question 14

how is the marginal prospensity to withdraw calculated

Answer 14

maginal prospensity to save + marginal prospensity to tax + marginal prospentisty to widthdraw

Question 15

how is the multiplier calculated

Answer 15

1/1-MPC or 1/MPW

Question 16

what is the effect of the multiplier on AD

Answer 16

The multiplier leads to an increase in AD higher than the original increase but for it to have the desired effect, there must be sufficient ​spare capacity in the economy (i.e. it cannot be at full output) for extra output to be produced.

Question 17

What is the difference between wealth and income

Answer 17

Wealth is a ​stock of assets whilst income is a ​flow​.

Wealth is the things people own.

income is the money they receive.

Question 18

Draw a short term AD - AS diagram where both AD and AS increase

Answer 18

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Question 19

Draw a classical LRAS curve which has an equilibrium position off the LRAS curve

Answer 19

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Question 20

What do classical economists believe about LRAS

Answer 20

Classical economists believe that the economy will always return to full employment level and therefore there will be no unemployment in the long run.

Question 21

Explain using graph what the classical view is when SRAS1 and AD2 intersect

Answer 21

Classicists conclude that an increase in AD will increase price and output in the short run but over time, prices will continue to rise as the economy moves back to the long-term equilibrium. Therefore, output has not changed and ​the only way to increase output is by increasing the LRAS​. Changes in AD without a change in the LRAS are only inflationary.

Question 22

Draw a classical LRAS curve where there is a change in LRAS

Answer 22

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Question 23

Explain using graph what the classical view is when there is an increase in LRAS

Answer 23

A rise in long run aggregate supply is likely to lead to ​lower prices and higher output​. When this is compared to a rise in AD which causes increase prices and no higher output, it is clear to see why classical economists ​favour supply-side policies over demand management

Question 24

Draw a Keynesian LRAS diagram with a shift in AD and explain it

Answer 24

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Question 25

What is the key factor which the impact of change in AD is strongly dependent on in the Keynesian theory

Answer 25

the impact of a shift in AD strongly ​depends on the elasticity of the curve, and hence whether the economy is at or near full employment.

Question 26

Draw a Keynesian curve with a shift in LRAS and explain it

Answer 26

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Question 27

What do keynsainas believe needs to be done by the government during a recession

Answer 27

during recessions the government needs to work to increase AD​ rather than using supply side policies.

Question 28

What determines the size of the multiplier effect

Answer 28

the marginal propensity to consume (MPC). The lower the leakages, the higher the MPC, the bigger the multiplier.

Question 29

What is a negative multiplier effect

Answer 29

withdrawal from the economy could lead to an even further fall in income, decreasing economic growth and possibly leading to a decline in the economy. This means that government plans to cut deficits will lead to an even further decrease of the economy.

Question 30

What are the effects of a growth multiplier on the economy

Answer 30

The multiplier means that ​growth can occur quicker​, as any injections lead to a bigger increase in national income.

Question 31

Why is the marginal propensity to withdraw increased

Answer 31

Because of an increase in the marginal propensity to:

Save
Tax
Import

Question 32

What is the most important factor in-order for the multiplier effect to take place

Answer 32

The higher the MPC, the bigger the multiplier as this means more money of income is spent so more money is transferred through the circular flow and less is withdrawn.

Question 33

What would be the impact of the multiplier on the AS

Answer 33

If the AS is perfectly inelastic, like on the classical LRAS curve, then the only impact of the multiplier will be to increase price; it will not affect output in the long run, although it will in the short run. The more ​elastic the curve, the smaller the effect on price but the bigger the effect on output.

Question 34

When will the multiplier have the biggest effect on the economy

Answer 34

multiplier will have a big effect when there is plenty of spare capacity in the economy and the MPW is low/MPC is higher. It has little effect on output when there is little spare capacity in the economy so the rising demand only creates rising prices.