2.4 National Income Flashcards
What are injections? And the examples
Monetary additions to the economy:
Government spending
Investment
Exports
What are withdrawals/leakages? Examples
Withdrawals/leakages are where money is removed from the economy:
Taxes
Savings
Imports
What happens if the sum of leakages/withdrawals are greater than the sum of injections?
The economy will be shrinking and if it’s the other way around the economy will be growing
What is the multiplier process?
The idea that an increase in AD due to an increased injection can lead to a further increase in national income
What is the ratio of the multiplier?
The final change in income to the initial change in injection
What is the size of the multiplier determined by?
How much of an increase in income people will spend, the MPC (marginal propensity to consume)
Effects of the multiplier on the economy
Means that growth can occur quicker as any injections lead to a bigger increase in national income
What is MPC?
Marginal propensity to consume: the increase in consumption following an increase in income
What is MPS?
Marginal propensity to save: The increase in savings following an increase in income
What is MPT?
Marginal propensity to tax: The increase in taxation following an increase in income
What is MPM?
Marginal propensity to import: The increase in imports following an increase in income
What is MPW?
Marginal propensity to withdraw: The increase in leakages following an increase in income
MPW=MPS+MPT+MPM
What is the formula for the multiplier?
Multiplier = 1/(1-MPC) OR 1/MPW
Effects of the multiplier on AD
Multiplier lead to an increase in AD higher than the original increase but for it to have the desired effect there must be sufficient spare capacity in the economy
What do households own in the circular flow of income?
Factors of production:
Land
Labour
Capital
Enterprise
