3.4: UK macroeconomy

Question 1

Ciruclar flow of income

Answer 1

Households -> expenditure on consumption (goods/services) -> firms
Firms -> income (labour,land,capital) -> households

Question 2

Labour paid in
Land paid for in
Capital paid for in

Answer 2

Wages
Rent
Interest

Question 3

What happens when the owner earns of profit

Answer 3

Some of which goes to owner as payment for ‘enterprise’

Question 4

Income

Answer 4

Flow of money owned

Question 5

Wealth

Answer 5

Value of all assets

Question 6

Factors influencing distribution of income/wealth

Answer 6

Taxation policy: regressive policies increase gap, progessive policies reduce it
Wage difference in high and low skill labour
Discriination against different groups of workers
Regional difference in earnings
Unsalaried individuals depending on state benefits

Question 7

Withdrawals from circular flow of income

Answer 7

Savings
Taxes
Imports

Question 8

Injections into circular flow of income

Answer 8

Exports (X)
Investment (I)
Government spending (G)

Question 9

What happens if injections exceed withdrawals?

Answer 9

Circular flow of income will expand. National income will rise

Question 10

What happens if withdrawals exceed injections?

Answer 10

Circular flow of income will shrink. National income will fall

Question 11

Example of an injection:

Answer 11

Expansionary fiscal policy -> govt spending rise

Question 12

Example of an withdrawal

Answer 12

Uncertainty -> consumers save, firms invest less

Question 13

Marginal propensity to consume =

Answer 13

Change in consumption / Change in income

Question 14

What does MPC represent?

Answer 14

The amount of each extra pound the consumer spends when given an extra pound in income i.e. if MPC is 0.25 each extra pound they spend £0.25
People with less money have higher MPC

Question 15

Marginal propensity to save =

Answer 15

Change in savings / Change in income

Question 16

What does MPS represent?

Answer 16

With every extra pound, how much they save of it

Question 17

Marginal propensity to tax =

Answer 17

Change in tax / Change in income

Question 18

What does MPT represent?

Answer 18

With every extra pound earnt, how much spent on tax
Can also mean marginal tax rate

Question 19

Marginal propensity to import =

Answer 19

Change in imports / Change in incomes

Question 20

What does MPM represent?

Answer 20

Proportion of extra pound earnt spent on imports

Question 21

The multiplier

Answer 21

An initial change in an injection or leakage that leads to a much greater final change in real national income. One person’s consumption is another’s income

Question 22

How does the multipier work?

Answer 22

Govt buolds New hospital for £50bn -> Govt spending rises by £50bn, AD and real GDP rise by £50bn -> Govt spends £35bn of the money ona construction firm -> Firm spends £10bn on investment (a component of AD), Invetsment (I) rises by £10bn, Firm spends £5bn on workers who receive higher incomes and spend, Consumer spending rises by £5bn (another component of AD) -> AD risen by £65bn (50bn + 10bn + 5bn) from £50bn -> if spending rises by £50bn, will be a rightward shift in AD, each stage of the multiplier effect will be viewed to add another rightward shift od AD each one smaller than the last

Question 23

What happens if MPC is high?

Answer 23

The multiplier is high - more money is passed on at each stage

Question 24

What happens if taxes rise?

Answer 24

More money is leaked -> MPC must fall -> multiplier falls

Question 25

Multiplier formula

Answer 25

Multiplier = 1 / (1-MPC)

Question 26

Marginal propensity to withdraw =

Answer 26

MPS + MPT + MPM