Macro 4 - National Income

Question 1

Define the term income

Answer 1

Income is a monetary inflow over a period of time

Question 2

Define the term wealth

Answer 2

Wealth is the total value of all the assets owned by individuals or firms in an economy

Question 3

What is the circular flow of income?

Answer 3

The circular flow of income is the flows of spending and income within an economy

Question 4

Explain what the circular flow of income describes

Answer 4

• Firms produce goods and services and all of these goods and services make up the national output
• The households in a country provide the factors of production used to produce the national output. The money paid to households by firms for these factors of production is the national income
• Households spend the money from the national income on goods and services firms create, the value of this spending is the national expenditure.
• All this creates a circular flow of income

Question 5

Draw a diagram showing the circular flow of income

Answer 5

See page 130 in the revision guide

Question 6

Define the term injections in terms of the circular flow of income

Answer 6

Injections are additions of money into the circular flow of income

Question 7

What are the 3 injections into the circular flow if income?

Answer 7

• Government spending
• Investments
• Exports

Question 8

Define the term withdrawals in terms of the circular flow of income

Answer 8

Withdrawals are leakages of money out of the circular flow of income

Question 9

What are the 3 withdrawals out of the circular flow of income?

Answer 9

• Taxes
• Savings
  Imports

Question 10

What are the 3 withdrawals out of the circular flow of income?

Answer 10

• Taxes
• Savings
• Imports

Question 11

What state is an economy in if injections into the circular flow of income and withdrawals are equal?

Answer 11

If injections and withdrawals are equal then the economy is in equilibrium

Question 12

What state is an economy in if injections into the circular flow of income are greater than withdrawals?

Answer 12

If injections are greater than withdrawals this means that expenditure is greater than output so firms will increase output. As a result the economy will grow

Question 13

What state is an economy in if withdrawals into the circular flow of income are greater than injections?

Answer 13

If withdrawals are greater than injections this means that output is greater than expenditure so firms will reduce output. As a result the economy will contract

Question 14

What is the multiplier effect?

Answer 14

The multiplier effect is when a change in an injection or withdrawal leads to an even bigger change in real GDP

Question 15

What does the size of the multiplier effect depend on?

Answer 15

The size of the multiplier effect depends on how quickly money from the initial injection leaks out of the circular flow of income.
The bigger the leakages the quicker money will leave the circular flow and the smaller the multiplier effect will be

Question 16

What is the effect on a shift in aggregate demand caused by the multiplier effect?

Answer 16

A large multiplier effect causes AD to shift again even further to the right than the original shift. The bigger the multiplier the greater the shift in AD

Question 17

Draw a diagram showing the initial rise is AD due to government spending and then a final rise in AD due to the multiplier effect

Answer 17

See page 10 in pack 4

Question 18

Define the term marginal propensity to consume (MPC)

Answer 18

The marginal propensity to consume is the proportion of any extra income that is spent on the consumption of goods and services

Question 19

Define the term marginal propensity to save (MPS)

Answer 19

The marginal propensity to save is the proportion of extra income that is saved

Question 20

What is the formula used to calculate the multiplier from the marginal propensity to consume (MPC)?

Answer 20

Multiplier = 1 / 1-MPC

Question 21

When calculating marginal propensities should money in calculations be in pounds or pennies?

Answer 21

Pounds

Question 22

What is the formula used to calculate the Marginal propensity to consume?

Answer 22

MPC = Change in consumption / Change in income

Question 23

What is the formula used to calculate the Marginal propensity to save?

Answer 23

MPS = Change in saving / Change in income

Question 24

Define the term marginal propensity to withdraw (MPW)

Answer 24

The marginal propensity to withdraw is the proportion of any new income that is withdrawn from an economy

Question 25

What is the formula for calculating the marginal propensity to withdraw (MPW)?

Answer 25

MPW = MPS + MPT + MPM

Question 26

Define the term marginal propensity to save (MPS)

Answer 26

The marginal propensity to save is the proportion of any new income that is saved

Question 27

Define the term marginal propensity to tax (MPT)

Answer 27

The marginal propensity to tax is the proportion of any new income that is paid as taxes

Question 28

Define the term marginal propensity to import (MPM)

Answer 28

The marginal propensity to import is the proportion of any new income that is used to import goods

Question 29

What must the sum of MPC and MPW always be equal to?

Answer 29

MPC + MPW = 1

Question 30

What is the formula used to calculate the multiplier from the marginal propensity to withdraw (MPW)?

Answer 30

Multiplier = 1 / MPW