4 Circular Flow Of Income

Question 1

Explain income, output and expenditure methods of measuring national income

Answer 1

Using the circular flow of I,e,o (a closed system)- meaning the flows must balance. This means there are 3 ways to measure total econ activity:

• incomes
• output
• total expenditure

All should give the same result

Question 2

Expenditure as a measure of national income :

Answer 2

Describes how resources are used (what proportion for c or I)

Question 3

Income as a measure of national income

Answer 3

Reports the way in which households earn there income.tells the balance between the rewards for CELL.

Question 4

Output as a measure of national income

Answer 4

Focuses on the economic structure of the economy - the balance between production such as agriculture, secondary activity (manufacturing/services).

Question 5

The circular flow of income

Answer 5

Picture

flow of products and income between producers/firms and households/consumers.

Question 6

The multiplier

Answer 6

The ratio of a change in equilibrium real income to the autonomous change that brought it about; it is defined as 1 divided by the marginal propensity to withdraw

Question 7

Injection into the circular flow

Answer 7

In the form of autonomous government expenditure, investment and exports.

Question 8

Withdrawals from the circular flow of income

Answer 8

Detract from the multiplier effect.

Saving
Taxation
Imports

Question 9

Distinguish between physical and monetary flows

Answer 9

X

Question 10

Average marginal propensity to consume ?

Average propensity to consume ?

Answer 10

Average propensity to consume: the proportion of income that households devote to consumer expenditure

Marginal ptc: the proportion of additional income devoted to consumer expenditure

Question 11

The average and marginal propensities to save

Answer 11

APS; the proportion of income which is saved

MPS: the proportion of additional income that is saved by households

Question 12

Marginal propensity to withdraw

Answer 12

The proportion of additional income that is withdrawn from the circular flow - the sum of the marginal propensities to save, import and tax.

Question 13

Marginal propensity to save, import and tax

Answer 13

The sum of theses forms the marginal propensity to withdraw

MP to tax: the proportion of additional income that is taxed

MP to import: the proportion of additional income that is spent on imports of goods and services

Question 14

Define multiplier and it’s purpose

Answer 14

The ratio of a change in equilibrium real income to the autonomous change that brought in about; it is define as 1 divided by the marginal propensity to withdraw

Role : It is the number of times a rise in national income exceeds the rise in injections of demand that caused it. Settles the equilibrium further to the right over time: increased national output as a result of the multiplier effect

Question 15

Define aggregate demand

Answer 15

The relationship between the level of aggregate demand and the overall price level; it shows planned expenditure at any given possible overall price level.

Question 16

Aggregate demand components

C, I

Answer 16

C + I + G + (X-M)

C = 60% majority: determined by incomes and other influences: interest rates, wealth and expectations about the future.

Investment; leads to increases in capital stock and is influenced by interest rates, past profits and expectations about future demand

Question 17

Ad components g, x-m

Answer 17

Gov expenditure: may be regarded as largely autonomous.

X-m: trade in goods and services is determined by the competitiveness of domestic products compared with the rest of the world (in which is determined by relative inflation rates and the exchange rate). Imports are effected also by domestic income, as exports are effected by income of the rest of the world.

Question 18

Autonomous spending

Answer 18

Such as government expenditure may give rise to a magnified impact on equilibrium output through the multiplier effect

Question 19

Evaluate the relationship between changes in income and consumption.

Answer 19

X

Question 20

Explain the relationship between ad and the price level

Answer 20

Ad curve slopes down - this is resultant from the way in which price levels impact the the various components that make up ad

When prices are low the purchasing power of income is relatively high. Low prices raise the value of household wealth. Low prices mean higher consumption : inverse relationship.

Low prices (relatively) men’s interest rates tend to be low also- this encourages investment and consumption expenditure (low cost of borrowing)

When uk prices are relatively low compare to the rest of the world, increased competitiveness of U.K. Goods means higher foreign demand(higher exports) as when as higher domestic consumption.

Overall low prices increase ad