2.4 National Income

Question 1

Draw the circular flow of income

Answer 1

FoP —- Goods/services

Question 2

What does the circular flow model show

Answer 2

The money flows between households and firms.

Households supply their FoP to firms and receive income as a reward.
Firms purchase FoP from households to produce goods/services, they sell these and receive revenue

Question 3

What is the diffreence between wealth and income

Answer 3

Income is the regular flow of earnings
Wealth is the stock of assets, accumulated over time

Question 4

What are the impacts of injections into the circular flow

Answer 4

injections are adding money into the circular flow and increase its size.

^ govt spending (G)
^ investment (I)
^ exports (X)

Question 5

What are the impacts of withdrawals into the circular flow

Answer 5

Withdrawals are leakages and remove money from the circular flow, making the economy smaller

^ savings by households
^ taxation by govt
^ imports (M)

Question 6

What is the multiplier ratio

Answer 6

ratio of change in real Y to the the injection that created the change

Question 7

What is the multiplier process

Answer 7

The idea that one individual’s spending is another individual’s income

Question 8

What are the effects of the multiplier on the economy