kt3

Question 1

*Shadow Economy

Answer 1

Payments for production which go unreported to the tax
authorities

Additional Information:
Also known as the black economy; where employers pay
workers in cash to evade tax (illegally); the larger this
sector, the more national income statistics will
underestimate living standards

Question 2

Circular Flow
of Income

Answer 2

Model which explains what determines the equilibrium
level of national income

Additional Information:
Model shows spending and income flows between
domestic households and firms; equilibrium is reached
when: national output= national income= national
expenditure (= aggregate demand)

Question 3

Injection (J)

Answer 3

Spending on domestic output which comes from outside
the simple circular flow of income i.e. investment,
government and exports

Additional Information:
This has a magnified effect on final national income by the
action of the Multiplier

Question 4

Withdrawal (W)

Answer 4

Income which is not spent on domestic output
(consumption) i.e. savings, taxation & imports

Additional Information:
Tends to reduce the strength of the Multiplier

Question 5

Aggregate
Demand (AD)

Answer 5

The sum of all planned spending on domestic output at a
given general price level per period

Additional Information:
AD = C + I + G + X _ M
G is government spending on public services (i.e.
excludes any transfer payments made to anyone who did
no productive work to earn it e.g. pensions, but includes
wages to NHS staff etc.),
Xis spen~ing by foreigners on UK exports, Mis spending
by UK residents on imports (subtracted since measured C
etc. includes some imports); ‘demand pull inflation’ is
caused when rightward shifts in AD causes slide up the
AS curve

Question 6

Aggregate
Supply (AS)

Answer 6

The sum of all planned domestic production at a given
general price level per period

Additional Information:
AS increases as firms become more able and willing to
produce extra output; policies designed to shift AS right
are ‘supply side policies’; where AS curve shifts left
through rising costs (e.g. rise in nominal wage inflation,
price of oil etc.) this creates ‘cost push inflation’

Question 7

Consumption (C)

Answer 7

Spending by domestic households on consumer goods &
services

Additional Information:
Is determined by: current income, wealth, interest rate,
expected income, tax rates, inflation, demography etc.

Question 8

Wealth Effect

Answer 8

A rise in personal wealth will encourage consumers to
spend more and save less

Additional Information:
Rises in wealth come from: rise in house values, rise in
stock market