2.4 National Income Flashcards
What is the circular flow of income model?
The circular flow of income model shows the flow of money and goods between households and firms in a two-sector economy.
What do households provide to firms in the circular flow of income model?
Households provide land, labour, and capital to firms in exchange for rent, wages, interest, and profits.
How is economic activity measured in the circular flow of income model?
Economic activity is measured by national output, national expenditure, and national income.
What happens if government spending exceeds taxation in the circular flow of income?
If government spending exceeds taxation, it can increase the flow of income in the economy.
What are injections in the economy?
Injections are monetary additions to the economy, including government spending (G), investment (I), and exports (X).
What are withdrawals in the economy?
Withdrawals are where money is removed from the economy, including taxes (T), savings (S), and imports (M).
What occurs when injections are greater than withdrawals?
The economy will be growing.
What is the equilibrium position of national output?
The equilibrium position is where the aggregate demand (AD) and aggregate supply (AS) curves intersect.
What do classical economists believe about long-run aggregate supply?
Classical economists believe the long-run aggregate supply (LRAS) is perfectly inelastic and that the economy will return to full employment.
What is the impact of a shift in the AD curve according to classical economists?
A shift in the AD curve will only affect price levels in the long run, not the national output.
How do Keynesian economists view equilibrium and employment?
Keynesian economists believe equilibrium can occur at less than full employment, where the LRAS curve is horizontal.
What is the multiplier process?
The multiplier process is the idea that an increase in aggregate demand due to injections can lead to a further increase in national income.
What determines the size of the multiplier?
The size of the multiplier is determined by the marginal propensity to consume (MPC) and the level of leakages.
What is the marginal propensity to consume (MPC)?
The MPC is the increase in consumption following an increase in income.
What is the formula for calculating the multiplier?
Multiplier = 1 / (1 - MPC)
What happens if the economy is at full capacity when AD increases?
If the economy is at full capacity, the increase in AD will only lead to higher prices, not an increase in output.
What are the effects of a negative multiplier?
A negative multiplier effect can lead to a further fall in income and decrease economic growth.
What factors affect the marginal propensity to consume?
Factors include changes in income, interest rates, and overall economic conditions.
What is the relationship between wealth and income?
Wealth is a stock of assets, while income is a flow; countries with high wealth often have high income, but the correlation is not perfect.
What is the balance of trade?
The balance of trade is the difference between the level of imports and exports.
True or False: Classical economists believe that an increase in AD will lead to higher output in the long run.
False.
Fill in the blank: Injections include G, I, and _______.
X
Fill in the blank: Withdrawals include T, S, and _______.
M
What does the Keynesian view say about government intervention during recessions?
Keynesians argue that the government should increase aggregate demand during recessions.
