2.4 National Income

Question 1

What is the Circular Flow of income?

Answer 1

• Shows how money and goods flow through the economy

Question 2

What are the 3 Injections?

Answer 2

• X I G

(Exports, Investment, Government Spending)

Question 3

What are the 3 withdrawals?

Answer 3

• T M S

(Taxation, Imports, Savings)

Question 4

What is the Multiplier? The formula?

Answer 4

• Occurs when an injection into the economy (X I G) causes a further increase in national income
• Multiplier = 1 / (1 - MPC) = 1 / (MPW)

Question 5

What does the size of the multiplier depend on?

Answer 5

• The marginal propensity to consume

Question 6

What will the effect of the multiplier be in the Long-Run?

Answer 6

• Purely inflationary (if LRAS curve is perfectly inelastic)