National and International Economy

Question 1

What are the three injections

Answer 1

Investment
Government spending
Exports

Question 2

What are the three withdrawals

Answer 2

Savings
Taxation
Imports

Question 3

Define marginal propensity to consume

Answer 3

The increase in consumption following an increase in income

Question 4

How do you calculate the multiplier

Answer 4

Multiplier = 1/(1 - mcp)
Multiplier = 1 / (mps + mpt + mpm)

Question 5

How do you use the multiplier

Answer 5

Multiplier x injection = total increase in GDP

Question 6

Define the multiplier effect

Answer 6

When an injection into the circular flow leads to a greater proportional increase in AD

Question 7

Define the accelerator effect

Answer 7

An economic postulation whereby investment expenditure increases when aggregate demand/national income increases

Question 8

Explain the accelerator effect

Answer 8

1) Increase in consumer demand
2) Firms get close to full capacity
3) Firms invest to meet rising demand and increase capacity

Question 9

Define an economic shock

Answer 9

An unexpected or unpredictable event that effects the economy

Question 10

What two ways can shocks be categorised

Answer 10

1) demand-side or supply-side
2) positive or negative

Question 11

What are world demand shocks

Answer 11

Shocks associated with a rise or a decline in spending and confidence abroad

Question 12

What are world supply/price shocks

Answer 12

Shocks that affect the global supply and the price of goods and services

Question 13

Give 2 supply side shocks that have resulted from COVID-19

Answer 13

1) fall in productivity due to disrupted economic supply chains, temporary business closures and growth in business bankruptcies
2) a fall in business investment due to a loss of confidence

Question 14

Give a demand side shocks as a result of COVID-19

Answer 14

1) Sharp fall in consumer demand due to shop closures, leading to a rise in unemployment and a rise in redundancies

Question 15

Give 3 points of evaluation when analysing economic shocks

Answer 15

1) the size of the shock - a slowdown is not the same as a recession
2) the scale of the shock- regional vs global
3) what are the multiplier/accelerator effects?
4) Can economic policy respond - is the response likely to be effective?

Question 16

What can demand and supply side shocks cause

Answer 16

Cyclical instability - leading to booms and slumps in the economy

Question 17

What is another cause of cyclical instability

Answer 17

Confidence
1) when the economy shows signs of instability, consumers and firms become risk averse
2) may lead to individuals saving a larger % of their income
3) larger saving rate can cause a larger fall in output and thus more instability
(Made worse by herding habits)