Circular Flow of Income

Question 1

mutliplier effect

Answer 1

process by which an intital change in spending generates a much higher final increase in GDP, as this will create more incomes which will in turn be spent and create even more incomes

found by 1/mpw

which continues until the change in injections is matched by the change in withdrawals

USE A NUMERICAL EXAMPLE: assume close economy with no govt, mps of 0.2

Question 2

define mps

Answer 2

(STATE FULL FORM) proportion of extra income saved

change in savings/change in incomes

Question 3

mpc

Answer 3

proportion of extra income spent

change in consumption/change in income

Question 4

mpm

Answer 4

proportion of extra income spent on imports

change in import expenditure/change in income

Question 5

mps

Answer 5

proportion of extra income saved

change in saving/change in income

Question 6

what are the average propensities to…

consume, invest, save, tax, import

Answer 6

total C/I/S/T/M divided by total income

Question 7

art and mrt

Answer 7

art = proportion of income taken in tax = total tax/total income

mrt - proportion of extra income paid in tax = change in tax/change in income

Question 8

define aggregate expenditure

Answer 8

total amount spent in an economy at different levels of GDP in a given time period, made up of consumption (C), investment (I), government spending (G) and net exports (X-M)