2.4 National Income

Question 1

What is the circular flow of income?

Answer 1

An economic model that illustrates money flows in an economy

Question 2

What does the simple model of the circular flow of income consist of?

Answer 2

households and firms

Question 3

What does the complex model of the circular flow of income consist of?

Answer 3

Households, firms, government,financial sector, foreign trade

Question 4

What are injections?

Answer 4

Add money into the circular flow of income and increase its size

-increased gov spending
- increased investment
- increased exports

Question 5

What are withdrawals?

Answer 5

Removes money from the circular flow of income and reduce its size

• increased savings by households
• increased taxation
• increased imports

Question 6

What does the classical economists believe?

Answer 6

They believe that the economy will always return to its full potential level of output and all that will change in the long run is average price level

Question 7

What do Keynesian economists believe?

Answer 7

They believe that the economy can be in long run equilibrium at any point of output

Question 8

What is the multiplier ratio?

Answer 8

The ratio of change in real income to the injection that created the change

Question 9

How do you work out multiplier?

Answer 9

Change in real GDP
Multiplier = ——————————-
Change in injections

Question 10

What are net withdrawal?

Answer 10

Contraction of production

Output decreases