Circular Flow Of Income ( 2 ) Flashcards
What is the marginal propensity to save?
• The proportion of each additional pound of household income that is used for saving.
What marginal propensities have an effect on the multiplier?
- MPC
- MPS
- MPT
- MPM
What is the formula for MPW ( Marginal Propensity to withdraw )?
MPW = MPS + MPT + MPM
How does the MPS affect the multiplier?
The larger the MPS, the smaller the size of the multiplier
How does the MPC affect the multiplier?
The larger the MPC, the bigger the size of the multiplier
How could the government influence MPC?
Changing the rate of direct tax, through lower income tax, more disposable income will be available to households, potentially increasing their propensity to consume.
What is the average propensity to consume?
The percentage of income spent rather than saved.
How is APS calculated?
Total consumption / Total Income
What is the MPS + MPC?
1
How does MPS affect the multiplier?
The more consumers save as oppose to spend, the smaller the size of the multiplier.
What is the APS?
Proportion of income that is saved, as opposed to being spent.
What is the MPT?
• Proportion of each pound taxed by the government.
How does MPT affect the multiplier?
• The higher the rate of tax, the less disposable income each consumer has, and the smaller the size of the multiplier.
What is the MPM?
Marginal propensity to import.
• If consumers spend income on imports rather than domestic goods & services, income is withdrawn from the circular flow of income.
• Reducing the size of the multiplier, as total leakages rise.
What is wealth?
Total value of all the assets owned by individuals or firms in an economy.
