2.4 National Income

Question 1

Injections

Answer 1

An injection into the circular flow of income is money which enters the economy.
This is in the form of government spending, investment and exports.

Question 2

Withdrawals

Answer 2

A withdrawal from the circular flow of income is money which leaves the economy.
This can be from taxes, savings and imports.

Question 3

The impact of injections and withdrawals from the circular flow of
income

Answer 3

The economy is in equilibrium when withdrawals equal injections.

Net injections cause economic growth and higher output.

Net withdrawals shrink the economy, reducing output.

Question 4

Multiplier
Meaning / Equation

Answer 4

The process by which any changes in the components of AD will lead to an even greater change in national output.

Equiation:
1 / 1 - MPC
or
1 / MPW

Marginal propensity to consume (MPC)

MPW ( MPS + MPT + MPM )
Marginal propensity to save (MPS)
Marginal propensity to tax (MPT)
Marginal propensity to import (MPM)

Question 5

Accelerator

Answer 5

Changes in investment can be directly linked to changes in the rate of GDP growth

Question 6

Meanings ( MPS , MPT , MPM )

Answer 6

MPS (Marginal Propensity to Save): The fraction of additional income that is saved rather than spent.

MPT (Marginal Propensity to Tax): The fraction of additional income that the government taxes.

MPM (Marginal Propensity to Import): The fraction of additional income spent on imports rather than domestic goods.

Question 7

The significance of the multiplier to shifts in AD

Answer 7

If injections increase (e.g., higher government spending), the multiplier effect causes AD to shift up (right), leading to higher national output and employment.

If injections decrease, the multiplier effect causes AD to shift down (left), resulting in lower output and potential job losses.

In short, the stronger the multiplier, the more significant the shift in AD.

Question 8

Keynesian Model & Classical Model

Answer 8

Keynesian Model
Focus: Short-term economic fluctuations.
Key idea: Aggregate demand (C + I + G + (X - M) drives output.
Government role: Active intervention ( increased spending ) to boost demand and reduce unemployment.
Assumption: Prices and wages are sticky, causing long period of unemployment.

Classical Model
Focus: Long-term economic growth.
Key idea: The economy naturally reaches full employment with flexible prices and wages.
Government role: Minimal, as markets self-correct.
Assumption: Economy is self-adjusting, and supply-side factors (labour, capital) drive growth.