Circular Flow Flashcards
what is the physical flow from H to F
land labour and capital
what is the physical flow from F to H
Goods and services
what is the monetary flow from H to F
expenditure
what is the monetary flow from F to H
income
what are the three injections to the circular flow
exports, investment and gov spending
what is a withdrawal from the circular flow
Imports, savings, taxes
what is the distinction between income and wealth
wealth is the value of assets not in the circular flow but income is a flow of money in the circular flow
what does the size of the multiplier effect rely on
the rate at which money leaks out of the circular flow, bigger leakages = smaller multiplier
example of how an injection will be affected by the multiplier to further increase AD
Government invests in healthcare some of this will be used for healthcare wages, this will then be spent by consumers to increase consumption.
what is an evaluative point for the multiplier effect
time lag - it takes a long time to fully see the benefits
what is the marginal propensity to consume or save
proportion of any extra income that is spent or saved
calculation for MPC
change in income
what does a greater MPC result in
a greater multiplier effect as more money is kept in the circular flow for longer by being spent
how does income affect MPC
lower income higher MPC
how does development affect MPC
areas with less development have higher MPC
calculation for the multiplier with MPC
1 - MPC
what is the Marginal propensity to withdraw
the proportion of extra income that is withdrawn from an economy
calculation for MPW
MPW = MPS + MPT + MPM
MPT
Marginal propensity to tax
MPM
Marginal propensity to import
what does MPC + MPW =
1
how to calculate the multiplier with MPW
MPW
how does MPW affect the multiplier
the lower the MPW the bigger the multiplier
When will the multiplier effect have a bigger effect on AD
When there is more spare capacity in the economy as the multiplier will give a larger rise to output
