2.4 National income

Question 1

what is the circular flow of income?

Answer 1

shows how money moves through an economy in a constant loop from producers to consumers and back again through injections and leakages

Question 2

what are injections into the circular flow?

Answer 2

bring money into the economy
- exports
- govt. purchases
- investment spending on new goods

Question 3

what are leakages of the circular flow?

Answer 3

• savings
• taxes
• imports

Question 4

what is income?

Answer 4

a flow of money earned by people
eg wages, interest rates from savings, profits to shareholders, money from rental properties

Question 5

what is wealth?

Answer 5

the value of a stock of assets owned by someone/society as a whole eg savings,owning property, shares

Question 6

aim for circular flow?

Answer 6

injections to be bigger than leakages

Question 7

what shifts causes national income to fall?

Answer 7

• decrease in AD
• decrease in AS
  ➡️ lower equilibrium

Question 8

what shifts causes national income to rise?

Answer 8

• increase in AD
• increase in AS
  ➡️ higher equilibrium

Question 9

causes of falls in AS

Answer 9

• outward migration of skilled workers
• decline in investment
• effects on natural disasters
  ➡️higher inflation,reduce GDP,lower profits and employment and worsen trade balance

Question 10

what is the mutilplier effect?

Answer 10

a change in one of the components of AD can lead to a multiplied final change to the equilibrium level of GDP ➡️change in injections means more proportional increase in real GDP

Question 11

whats the multiplier ratio?

Answer 11

total change in real GDP = injection x multiplier

Question 12

multiplier formula (closed no govt)?

Answer 12

Multiplier = 1 / (marginal propensity to save)
or
Multiplier = 1 / (1-marginal propensity to consume)

Question 13

multiplier formula (closed w govt)?

Answer 13

1 / (sum of the marginal propensity to save + marginal rate of tax)

Question 14

multiplie formula (open w govt)?

Answer 14

1 / (sum of the propensities to save + tax + import)

Question 15

MPC?

Answer 15

Marginal propensity to consume
- The proportion of additional income that is spent in the domestic economy

Question 16

MPM?

Answer 16

Marginal propensity to import
- The proportion of additional income that is spent on imports

Question 17

MPS?

Answer 17

Marginal propensity to save
- The proportion of additional income that is saved

Question 18

MPT?

Answer 18

Marginal propensity to tax
- The proportion of additional income that is paid to the government as tax

Question 19

MPW?

Answer 19

Marginal propensity to withdraw
- The proportion of additional income leaving the circular flow

Question 20

why does the multiplier effect happen?

Answer 20

• one person’s additional expenditure constitutes a new source of income for another person, and this additional income leads to still more spending, and so on

Question 21

whats a positive multiplier?

Answer 21

when an initial increase in an injection leads to a greater final increase in real GDP

Question 22

how can you tell that the multiplier is high from an AD/AS diagram?

Answer 22

there will be a big gap between the equilibrium point on the AD line and the AS line with the GPL axis

Question 23

what is the accelerator effect?

Answer 23

there if often a surge in capital spending by businesses when an economy is growing quite strongly

• growth in GDP gives investors confidence to invest as they think the growth will continue