7.2 Circular flow and AD/AS

Question 1

How is RNI useful?

Answer 1

• It measures how successful the economy is - countries are often ranked in importance by the size of their national incomes
• It shows how well off the population is - measuring national income per person
• It allows a government to estimate how much can be collected in taxation (most taxes are placed on incomes and expenditure

Question 2

What are the 3 injections into the circular flow?

Answer 2

Government spending, exports and investment

Question 3

What are the 3 withdrawals from the circular flow?

Answer 3

savings, taxation and imports

Question 4

What is the multiplier ratio?

Answer 4

When there is an injection into the economy, the actual increase in output can be greater than the initial injection

Question 5

How do you calculate the marginal propensity to withdraw?

Answer 5

MPW = MPS + MPT + MPM

Sum of the Marginal propensity of withdrawals

Question 6

What does a demand side shock impact?

Answer 6

Demand side shocks will affect the level of national income, unemployment and inflation.

Question 7

What does a supply side shock impact?

Answer 7

Supply side shocks will affect the level of national income, unemployment and inflation

Question 8

What factors effect LRAS?

Answer 8

• Technology
• Factor mobility
• Enterprise - will increase the capacity of an economy
• Productivity
• Economic incentives and attitudes - incentives in taxes and benefits as well as changes in legislation

Question 9

What is an output gap?

Answer 9

The difference between the current level of GDP and the potential output of the economy.

Question 10

How do you show output gaps on an AD/AS diagram?

Answer 10

Negative output gap when short run output is to the left of the LRAS curve and below normal capacity.

Positive output gap when short run output is to the right of the LRAS curve and above normal capacity.