Macro 2 : Circular flow of income and GDP

Question 1

Explain why income=output=expenditure

Answer 1

The circular flow is a loop so income and output flow in a circle and any money that exist households will always enter the firms

Question 2

Explain what national income measures

Answer 2

The total value of all goods and services produced in an economy over a specific period of time

Question 3

Explain how real national income differs from nominal national income.

Answer 3

Real national income is adjusted for inflation, while nominal national income is not

Question 4

Explain why real national income is used as a measure of economic performance

Answer 4

It allows us to see if the national income has actually increased after inflation. A high national income means there is more money in the economy

Question 4

Explain what an injection into the circular flow of income is

Answer 4

Money entering the circular flow of income.

Question 5

Explain what a withdrawal from the circular flow of income is

Answer 5

Money leaving the circular flow

Question 6

Examples of an injection

Answer 6

Investments, Government Spending, Exports

Question 7

Explain how withdrawals and injections will affect the national income of an economy

Answer 7

If injections rises there nation income will increase as more money is in the circular flow. If withdrawals rises there nation income will decrease as less money is in the circular flow

Question 7

Examples of a withdrawal

Answer 7

Savings, taxation, imports

Question 8

What might cause the injections to increase

Answer 8

Investments - decrease in interest rates
Government Spending - Recession, infrastructure project
Exports - pound weakens, surplus in goods

Question 9

What might cause the withdrawals to increase

Answer 9

Savings - Increase in interest rates
Taxation - The Government running low on money
Imports - Pound strengthens, deficit in goods