2.4 - National Income Flashcards

1
Q

How are each of the FOP paid for

A

Labour is paid for in wages
Land is paid for in rent
Capital is paid for in interest
The owner of the firm earns profit, because the owner is from a household, the profits also go to the households as payment for ‘enterprise’

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2
Q

What is the multiplier ratio

A

The ratio of the final change in income to the initial change in income

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3
Q

What does the size of the multiplier process depend on

A

The size of the multiplier will be determined by how much of an increase in income people will spend (the MPC), the lower leakages, the higher the MPC, the higher the multiplier

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4
Q

Can you have negative multiplier effects

A

Yes

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5
Q

When does the multiplier effect create quickest growth

A

When injections are targeted at those with the highest MPC

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6
Q

What is MPC

A

calculated as the change in consumption (C) divided by change in income and represents the amount of each extra pound that the consumer spends when given an extra pound in income.

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7
Q

What is MPS

A

calculated as the change in savings divided by change in income

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8
Q

What is MPT

A

change in tax divided by the change in income,

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9
Q

What is MPM

A

change in imports purchased divided by the change in income

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10
Q

What is the formula for the multiplier effect

A

1 / (1-MPC)
OR
1 / MPW

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11
Q

What components make up the MPW

A

MPW = MPS + MPT + MPM

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12
Q

When will the multiplier effect have the biggest effect

A

When there is plenty of spare capacity
MPW is low / MPC is high

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13
Q

When does the multiplier effect have little effect on output

A

When there is little spare capacity in the economy so rising demand creates rising prices

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14
Q

What does the multiplier effect cause if AS is inelastic

A

Increased prices, no change on output

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