2.4 national income

Question 1

withdrawals into the circular flow of income

Answer 1

-savings
-taxes
-imports

Question 2

injections into the circular flow of income

Answer 2

-investment
-government spending
-exports

Question 3

distinction between income and wealth

Answer 3

income - a flow of money that goes to the factors of production e.g wages, profits, dividends

wealth - a stock of assets e.g savings, shares, property, bonds

Question 4

what is an injection

Answer 4

money which enters the economy in the form of government spending, investment and exports

Question 5

what is a withdrawal

Answer 5

money which leaves the economy this can be from taxes, savings and imports

Question 6

net injections

Answer 6

there will be an expansion of national output

Question 7

net withdrawals

Answer 7

there will be a contraction of production so output decreases

Question 8

equilibrium real national output

Answer 8

-the economy reaches a state where the rate of withdrawals = the rate of injections
-equivalent to the point where ad = as

Question 9

price changes

Answer 9

-at a price above equilibrium, there will be excess supply
-at a price below equilibrium, there will be excess aggregate demand in the short run

Question 10

shifts in ad

Answer 10

-if firms have less confidence or there is a recession, ad might shift inwards causing the price level to fall
-if ad increases the price level and level of national output both increase

Question 11

the multiplier ratio

Answer 11

-the ratio of the rise of national income to the initial rise in ad

Question 12

the multiplier process

Answer 12

-occurs when there is new demand in an economy
-leads to injection of more income in the circular flow of income leading to economics growth
-meaning more jobs created, higher average incomes, more spending and eventually more income created

Question 13

marginal propensity to consume

Answer 13

-the proportion of each additional pound of household income that is spent
-higher the mpc the bigger the size of the multiplier
-governments can influence this by changing the rate of direct tax

Question 14

marginal propensity to save

Answer 14

-the consumers mps plus mpc is equal to 1
-if consumers save more than they spend, the size of the multiplier will be small

Question 15

marginal propensity to tax

Answer 15

-the proportion of each pound taxed by the government
-higher the rate of tax, the lower disposable income

Question 16

marginal propensity to import

Answer 16

-if consumers spend income on imports rather then domestic goods and services this reduces the size of the multiplier as income is withdrawn from the circular flow of income

Question 17

formula for calculating the multiplier

Answer 17

1 / 1-mpc or 1 / mpw*

*mpw = mps + mpt + mpm

Question 18

significance or the multiplier to shifts in ad

Answer 18

-if there is lots of spare capacity, extra output can be produced quickly and at little extra cost
-this means as is elastic and the size of the multiplier will increase
-small increase in ad will lead to a large increase in national income
-best shown on the keynesian curve

Question 19

reverse multiplier

Answer 19

-withdrawal of income from the circular flow of income which could lead to an even larger decrease in income for the economy
-could decrease economic growth and lead to a decline in the economy