Macroeconomics L5

Question 1

Rewards of factors of production

Answer 1

Capital- interest
Land- rent
Enterprise- profit
Labour- wages

Question 2

Define national income

Answer 2

Level of total output in an economy as a whole

Question 3

Define closed economy

Answer 3

An economy where there is no foreign trade

Question 4

Define open economy

Answer 4

An economy where this is foreign trade and no government, only households and firms which spend all their income and revenues

Question 5

How does the circular flow of income work In a simple economy

Answer 5

• Households- own wealth, stock of land, labour and capital to produce goods and services
• supply these factors in firms in return for income (rents, wages, interest, profit)
• use this money to buy goods and services

Question 6

How can the circular flow of income model be used to show that there are 3 ways of measuring the level of economic activity

Answer 6

• national output (O) - value of flow of goods and services from firms to households
• national expenditure (E) - value of spending by households on goods and services
• national income (Y)- value of income paid by firms to households in return for factors of production

Question 7

The three ways of measuring flow are identical. How do we show this ?

Answer 7

O=E=Y

Question 8

Define injections

Answer 8

Spending which does not come from households

Question 9

What are the three types of Injections

Answer 9

• investment - spending by firms in new capital equipment and stocks of goods
• government spending - spending by central and local government as well as other government agencies
• exports - spending by foreigners in goods and servuces made in the UK

Question 10

What are the injections and leakages in a closed economy?

Answer 10

Leakage- savings

Injection - investment

Question 11

What are the injections and leakages in an open economy

Answer 11

Leakage=Imports

Injection = exports

Question 12

What is income

Answer 12

A flow of money going to factors of production (rewards of factors of production)

Question 13

What are the different measures of income

Answer 13

• -Original income= income from jobs, private pensions and interest from savings
• Gross income= original income + cash (welfare) benefits
• Disposable income= gross income - direct taxes
• Post-tax income = disposable income - indirect taxes

Question 14

Difference between money and real income

Answer 14

Income = money received as payment for work
Money = measures income at current prices (nominal income)

Question 15

Define real income

Answer 15

(Inflation adjusted) income measured at constant prices

Question 16

Define wealth

Answer 16

the value of a stock of assets owned by someone or society as a whole e.g savings, ownership of property , shares/ stocks, wealth held in pension schemes

Question 17

How do we measure income inequality

Answer 17

The Gini coefficient

Question 18

Define leakage.

Answer 18

Spending which does not flow back from households to firms

Question 19

What are the 3 leakages

Answer 19

• savings - money which is not spent by households ( in firms this is profit)
• taxation- taken money from households and firms
• imports - bought by households and firms

Question 20

Letters from all injections and leakages

Answer 20

• investment (I)
• government spending (G)
• exports (X)
• Savings (S)
• Taxes ( T)
• Imports (M)

Question 21

How do injections and withdrawals affect national income

Answer 21

• Injections greater than withdrawals = national income rises
• Injections less than withdrawals = national income contracts
• injections = withdrawals - circular flow in balance

Question 22

What are the three injections

Answer 22

• investment spending on new capital goods
• exports
• government spending

Question 23

equation for index number

Answer 23

number in current period / number in base period x100

Question 24

Aggregate demand equation

Answer 24

AD= C+I+G+(X-M)