2.4 national income Flashcards
what are the three injections into the economy
government spending
exports
investment
what are the three withdrawals of the economy
taxation
imports
saving
whats the multiplier effect
An increase in the cost of raw materials and energy increases the cost of production. This means the SRAS curve will shift left as it will cost more to make the same amount of goods and therefore businesses will only produce this amount of goods if prices rise
‘a persons spending is anothers income’
whats the multiplier ratio
the rise national income to the initial rise in AD
how can MPC effect the multiplier
The higher the MPC, the bigger the size of the multiplier. The government could influence the MPC by changing the rate of direct tax. If consumers have more disposable income due to lower income tax rates, their propensity to consume might increase.
how can MPS effect the multiplier
If consumers save more than they spend, the size of the multiplier will be
small
how can MPT effect the multiplier
The higher the rate of tax, the less disposable income each consumer has,
and the smaller the size of the multiplier.
how can MPM effect the multiplier
If consumers spend income on imports rather than domestic goods and services, income is withdrawn from the circular flow of income. This reduces the size of the multiplier.
how do you find the multiplier
1/(1-MPC)
or
1/MPW
how can the multiplier effect the economy
economy can grow quicker as injections lead to bigger s increase in national income. Injections are targeted to people with biggest MPC to increase the multiplier.
time lag so not evryone will see the effect straight aways
The overall effect on the economy will depend on the change in AD and the elasticity of the AS curve
how can the multiplier effect AD
increased AD higher than the orginal increase
If the AS is perfectly inelastic, like on the classical LRAS curve, then the only impact
of the multiplier will be to increase price
