2.4 - National Income

Question 1

What is national income?

Answer 1

the total value of output in an economy, shown by the circular flow

Question 2

Circular flow

Answer 2

Injections = government spending, investment, exports -> increase AD and growth

Leakages = taxation, savings, imports -> decrease AD and growth

Question 3

Income vs. wealth

Answer 3

Income is a flow concept and refers to what a person earns when factor inputs are put to use.

Wealth is a stock concept and refers to savings and assets accumulated over time.

Question 4

What is the multiplier?

Answer 4

• when there is an injection into the economy, the actual increase in output can be greater than the initial injection, depending on the size of the multiplier ratio
• the multiplier effect would shift AD to the right (increase AD) when there is an injection into the economy (progressively smaller shifts)

Question 5

Multiplier ratio

Answer 5

multiplier ratio = 1 ÷ (marginal propensity to withdraw)

Question 6

Marginal propensity to withdraw

Answer 6

MPW = additional income taken out of the economy (not spent in the domestic economy)

Question 7

MPW equation

Answer 7

MPW = 1 - MPC (marginal propensity to consume)
MPW = MPS + MPT + MPM
- marginal propensity to save
- marginal propensity to tax
- marginal propensity to import

Question 8

Positive and Negative multipliers

Answer 8

increase MPC -> increased positive multiplier
increase MPS -> decreased negative multiplier
increase MPT -> decreased negative multiplier
increased MPM -> decreased negative multiplier

Question 9

MPC equation

Answer 9

∆C ÷ ∆Y

Question 10

Multiplier equation

Answer 10

1 ÷ (1-MPC)
= 1 ÷ MPW