2.4 National Income Flashcards
What does the circular flow of income model represent?
A two-sector economy with households and firms exchanging resources and payments
Households provide land, labor, and capital to firms in exchange for rent, wages, interest, and profits.
In the basic circular flow model, how is national output related to national expenditure and national income?
National output = national expenditure = national income
These represent the flow of goods and services, household spending, and income paid by firms to households.
What role does the government play in the circular flow of income?
The government takes money out through taxation (T) and adds money through spending (G)
If government spending exceeds taxation, it can increase the flow of income.
Define wealth and income.
Wealth is a stock of assets; income is a flow of money
Wealth includes possessions like houses, while income includes money received from work or savings.
What are injections in the economy?
Monetary additions such as government spending (G), investment (I), and exports (X)
Injections stimulate economic activity by increasing overall spending.
What are withdrawals in the economy?
Monetary removals such as taxes (T), savings (S), and imports (M)
Withdrawals reduce the flow of money in the economy.
What happens when injections are greater than withdrawals?
The economy will be growing
Conversely, if withdrawals exceed injections, the economy will shrink.
What is the equilibrium level of national output?
The point where aggregate demand (AD) and aggregate supply (AS) curves intersect
Changes in AD or AS can shift this equilibrium.
How do Keynesian and Classical economists differ in their view of short-run equilibrium?
Keynesians see AD as downward sloping and AS as upward sloping; Classical economists agree but focus on long-run outcomes
Both schools recognize the importance of shifts in AD and AS.
What does a perfectly inelastic long-run aggregate supply (LRAS) curve imply?
Changes in price do not affect output in the long run
Classical economists believe the economy returns to full employment, regardless of short-term fluctuations.
What is the multiplier process?
The idea that an increase in aggregate demand (AD) from injections can lead to a larger overall increase in national income
It is calculated as the ratio of the final change in income to the initial change in injection.
What factors determine the size of the multiplier?
Marginal propensity to consume (MPC) and the level of leakages
A higher MPC leads to a larger multiplier effect.
Fill in the blank: The marginal propensity to consume (MPC) is the increase in ______ following an increase in income.
consumption
Fill in the blank: The marginal propensity to save (MPS) is the increase in ______ following an increase in income.
savings
True or False: The multiplier effect can lead to a negative outcome if there are significant withdrawals from the economy.
True
A negative multiplier effect can occur, leading to further decreases in economic growth.
