LS5&7- circular flow and Multiplier

Question 1

What is national income?

Answer 1

The total output of an economy

Question 2

What are the 3 injections?

Answer 2

Investment on capital goods, government spending, exports

Question 3

What are the 3 withdrawals?

Answer 3

Saving, taxation, imports

Question 4

Define wealth

Answer 4

The value of assets owned by a household

Question 5

What happens if injections and withdrawals are not in equilibrium?

Answer 5

If injections are greater, output increases so income rises

If injections are lower, expenditure is greater so output falls

Question 6

What is the multiplier effect?

Answer 6

Injections into the circular flow eventually lead to an even bigger increase in national income

Question 7

What is the formula for the multiplier?

Answer 7

Final increase/initial investment

1/MPW

Question 8

What is marginal prosperity to save?

Answer 8

Proportion of extra income saved

MPS= change in savings/change in income

Question 9

What is marginal prosperity to consume?

Answer 9

Proportion of extra income spent

MPC = change in consumption/change in income

Question 10

Formula for MPC AND MPS

Answer 10

MPS + MPC = 1

Question 11

What is marginal propensity to tax?

Answer 11

Proportion of extra income spent on tax

Question 12

Formula for MPW

Answer 12

MPS+MPM+MPT

Question 13

What is the effect of increased AD?

Answer 13

Higher output, higher employment, higher inflation

Question 14

Factors that affect multiplier?

Answer 14

Anything that affects the amount of income spent:
Change in interest rates 
Change in wealth 
Change in tax
Imports