2.4 National Income

Question 1

Circular flow of income

Answer 1

A simplified model of income/money flows into/out of and around a country between firms, households, governments and other countries

Question 2

Income

Answer 2

A flow of money, the return on the ownership of the factors of production

Question 3

Wealth

Answer 3

A stock of money, often held by households in the ownership of assets.

Question 4

Circular flow of income simplification

Answer 4

The government needs to be added as they take money out of the economy through taxation and add money by spending
Needs to introduce financial services who can inject money into the system through investment and take away when consumers save
Foreign markets are added as foreigners buy British goods so exports add money to the flow and imports take money away from the flow

Question 5

Injections

Answer 5

Income and money that flows in an economy. Investment, gov spending and exports . Creates a multiplier effect

Question 6

Leakages

Answer 6

Income and money that flows out of an economy. Taxes, savings and imports. These leakages will reduce the strength of multiplier effect

Question 7

Increasing AD and AS

Answer 7

A factor that affects AD can easily affect AS. One example of this could be investment. Increase in I, increases AD, which increases LRAS

Question 8

Multiplier effect

Answer 8

Where one persons spending is another persons income where an injection of AD leads to an even greater final increase in real GDP. May also be negative. Key evaluation point when determining any change in a component of AD on the final change of real GDP

Question 9

Size of multiplier effect

Answer 9

Dependent on MPC

Question 10

Multiplier ratio

Answer 10

The ratio of the final change to initial change in an injection

1/1-MPC or 1/MPW

Question 11

Effects on economy

Answer 11

Multiplier means that growth can occur quicker. Injections can be targeted at those with biggest MPC
Impossible for government to know the exact effect of their spending as it is difficult to know the size of multiplier
Time lag between increase in Y and full effect of increase

Question 12

Marginal propensity to tax

Answer 12

The increase in taxation following an increase in income

Question 13

Marginal propensity to import

Answer 13

The increase in imports following an increase in income

Question 14

Marginal propensity to withdraw

Answer 14

The increase in leakages following an increase in income

MPS+MPT+MPM

Question 15

Effect of change on AD

Answer 15

For multiplier to have desired effect, there must be sufficient spare capacity
If AS is perfectly inelastic, the only impact of the multiplier will be to increase price. The more elastic the curve, the smaller the effect on price and bigger effect on output
The effect of multiplier depends on shape of AS curve.