Macroeconomics 1

Question 1

What is the circular flow of income

Answer 1

A model of the economy showing money flows between households and firms. Consumption and income flows as financial flows for factors of productions and goods and services

Question 2

How do households gain factor incomes

Answer 2

Households gain factor incomes for providing their factors of production to produce goods and services

Question 3

Where do households spend their income

Answer 3

Households will spend their income on firms’ goods and services

Question 4

What is GDP

Answer 4

The key measure of national income - Gross Domestic Product

Question 5

What are the injections into the circular flow

Answer 5

Money can be injected into the circular flow via business investment (I), Government spending (G) and exports (X)

Question 6

What are the withdrawals from the circular flow

Answer 6

Savings (S), taxation (T) and imports (M)

Question 6

What represents economic growth in the circular flow

Answer 6

When injections are greater than withdrawals as the amount of money in the circular flow increases

Question 7

What represents a fall in GDP in the circular flow

Answer 7

When injections are less than withdrawals so the amount of money in the circular flow decreases

Question 8

What is the multiplier effect

Answer 8

The number of times a rise in income exceeds the rise in injections that caused it

Question 9

What is the multiplier ratio

Answer 9

The ratio of a change in equilibrium real income to the autonomous change that brought it about

Question 10

How can investment increases cause the multiplier effect

Answer 10

If a firm is successfully expanding then there should be more profit to distribute to shareholders. Increase income for shareholders means increase spending which will generate more profit for firms to invest and expand further

Question 11

How can government spending cause the multiplier effect

Answer 11

More government spending means more jobs in the public sector which means increased spending of workers which would generate more profits for firms to invest and expand

Question 12

How can export increases cause the multiplier effect

Answer 12

More exports and therefore more profits and earnings. Increase shareholder dividends and the possibility of new jobs increases leading to higher income for households therefore more spendings which would generate more profits for firms to invest and expand

Question 13

Relationship between withdrawals and the multiplier affect

Answer 13

The higher these withdrawals the smaller the size of the multiplier overall

Question 14

Definition of MPC and how to calculate it

Answer 14

Marginal propensity to consume is the proportion of additional income that is spent. MPC = Change in consumption divided by change in income

Question 15

Definition and how to calculate MPS

Answer 15

Marginal propensity to save is the proportion of additional income that is saved. MPS = Change in saving divided by change in income

Question 16

Definition and how to calculate MPT

Answer 16

Marginal propensity to tax is the proportion of additional income that is taxed. MPT = Change in tax payed divided by change in income

Question 17

Definition and how to calculate MPW

Answer 17

Marginal propensity to withdraw is the proportion of additional income that is withdrawn from the circular flow in tax, saving or imports. MPW = Change in withdrawals (MPS+MPT+MPS) divided by change in income

Question 18

Definition and how to calculate MPM

Answer 18

Marginal propensity to import is the proportion of additional income that is spent on imports. MPM = Change in imports purchased divided by change in income

Question 19

How to calculate the size of the multiplier

Answer 19

1 divided by (1-MPC) = 1 divided by (MPW)

Question 20

Definition of income

Answer 20

A flow of money which acts as a reward for the services of factors of production

Question 21

Definition of wealth

Answer 21

The stock of assets held by an individual or organisation

Question 22

Difference between real and nominal income

Answer 22

Real income adjusts income for the effects of inflation whereas nominal income does not

Question 23

Examples of income

Answer 23

Wages, salaries, interest on savings, profits/ dividends

Question 24

Examples of wages

Answer 24

Shares/ business ownership, houses, savings in a bank

Question 25

Link between Income and Wealth and reason behind it

Answer 25

Income and wealth have a positive correlation because high levels of income can help build up wealth as those on a higher income can afford to build up their wealth. Or high levels of wealth can earn income for example if someone owns share they. can earn dividends over time to increase income.

Question 26

What is a macro economic objective

Answer 26

The aims or targets of a Government to improve economic welfare

Question 27

What are the main macroeconomic objectives

Answer 27

• Economic growth
• Low unemployment
• Low and stable inflation
• Balance of payments equilibrium on the current account
• A balanced Government budget
• Greater income equality
• Protection of the environment

Question 28

Why should economic growth be the most important economic objective

Answer 28

Boosts living standards in the country as there should be higher rates of employment and incomes for citizens

Question 29

What is economic growth

Answer 29

Economic growth exists if there is a rise in economic activity as measured by increase in real output GDP from one year to another

Question 30

Why should low unemployment be the most important economic objective

Answer 30

When less people are employed less spending takes place as people’s MPC is much less as they want to save as much as they can, therefore when unemployment rate increases the GDP of the country falls
When people are unemployed, the economy is not fully utilising its available labor force, which can lead to a loss in productivity and output.
- Social unrest
Unemployed individuals are more likely to rely on government support programs such as unemployment benefits, food assistance, and healthcare subsidies, which can create a fiscal burden.

Question 31

What is inflation

Answer 31

Inflation means the increase in general prices in the economy

Question 32

Why should low and stable inflation be the most important economic objective

Answer 32

A low and stable inflation rate (around 2%) provides a stable environment for the businesses to invest and grow and protects our international competitiveness of UK goods and services, as well as being affordable for consumers.
Low inflation preserve the purchasing power of money, rising prices means people’s wages cannot meet the rate a which the price of goods and services increases, meaning spending decreases with high inflation, also puts more strain on the government with more people on benefits
Low inflation allows businesses to prepare for changes in the market

Question 33

What is balance of payments equilibrium on the current account

Answer 33

Means that the value of exports going out of the country is equal to or greater than the value of imports coming into the country.

Question 34

Why should balance of payments equilibrium on the current account be the most important economic objective

Answer 34

The problem with a current account deficit is that it must be financed in some way and can be an indication of an uncompetitive manufacturing sector, constraining export led growth.
A persistent current account deficit may suggest that a country is consuming more than it produces, relying on borrowing or inflows of foreign capital to finance this gap. - helps to maitiain longterm economic stability

Question 35

What is a balanced government budget

Answer 35

A balanced budget ensures the government keeps control of state borrowing, so the sum of money given to the government through taxes is equal to that of which they are spending.
Creates stability as planning a balanced budget helps governments to avoid excessive spending and allows them to focus funds on areas and services that require them the most. Furthermore, achieving a budget surplus can provide funds for emergencies.
A balanced budget can help control inflation by reducing the need for the central bank to increase interest rates to counteract excessive government borrowing and spending.

Question 36

Why is should maintaining a balanced government budget be the most important economic objective

Answer 36

The government has to pay interest on the money they borrow meaning they lose more money in the longterm by borrowing.

Question 37

Why should greater income equality be the most important objective

Answer 37

Greater income equality would increase the income of lower earners which would increase their MPC causing them to spend more and boost the economy through the multiplier effect
Fosters a more secure and productive economy as it can stimulate consumer spending
Allows for more social mobility, income inequality has increased

Question 38

Limitation of greater income equality

Answer 38

Although some argue that income inequality gives an incentive to work and earn income., hence fuelling growth in the economy