2.4 National Income Flashcards
What is the circular flow of income
Represents the movement of money in an economy
What are household in the flow of income
provide factors of production to firms and receive wages, rent, interest, and profits.
What are firms in the flow of income
Produce goods and services, which are bought by households, firms, and the government.
What is the government role in the flow of income
Collects taxes and injects spending back into the economy
What are leaks
- Savings
- Taxes
- Imports
What are injections
- Investment
- Government spending
- Exports
What is income
Money received regularly (e.g., wages, interest, dividends).
What is wealth
Stock of assets accumulated over time (e.g., property, savings, investments).
What is an injection
Money put into the economy increasing national income
What is the effect of injections
- Boosts economic activity
- Higher output and income
What are withdrawals
Leakages from the economy, reducing national income
What is the effect of withdrawals
Reduce the flow of income and can lead to lower output and income levels.
How do withdrawals and injections impact the economy
When injections exceed withdrawals, the economy grows. When withdrawals exceed injections, the economy contracts
What is equilibrium output
the level of national income where total spending (aggregate demand) equals total output (aggregate supply).
What do shifts in AD do to the economy
- Increase in AD: Causes higher output and higher prices (inflation).
- Decrease in AD: Leads to lower output and lower prices (recession).
What do shifts in AS do to the economy
- Increase in AS: Causes higher output and lower prices (deflationary pressure).
- Decrease in AS: Leads to lower output and higher prices (stagflation).
What is the multiplier ratio
measures the total increase in national income resulting from an initial injection
What is the formula of the multiplier ratio
1 / 1-MPC
How does the multiplier effect work
an initial increase in spending leading to a chain reaction of further spending
What is MPC
MPC (Marginal Propensity to Consume): The proportion of additional income that is spent on consumption. Higher MPC → larger multiplier
What is MPS
MPS (Marginal Propensity to Save): The proportion of additional income saved rather than spent. Higher MPS → smaller multiplier.
What is MPT
MPT (Marginal Propensity to Tax): The proportion of additional income taxed. Higher MPT → smaller multiplier.
What is MPM
MPM (Marginal Propensity to Import): The proportion of additional income spent on imports. Higher MPM → smaller multiplier, as money flows out of the economy
What are the different multiplier calculations
1 / 1-MPC , 1/MPW , MPS + MPT + MPM
What is the Significance of the Multiplier for Shifts in AD
The multiplier effect shows that a change in one component of aggregate demand (e.g., an increase in government spending or investment) can lead to a larger change in national income.
