National income

Question 1

what is the circular flow of income?

Answer 1

it is a basic way of understanding how different parts of the economy fit together.
circular flow of income and spending shows connections between different sectors and shows the flow of goods/services and incomes to FOP.

Question 2

what is the distinction between wealth and income?

Answer 2

Wealth is a stock of assets whilst income is a flow. Wealth is the things people own e.g.
houses, possessions whilst income is the money they receive e.g. money from work, interest
from savings. Countries with high levels of wealth tend to have high levels of income and
vice versa but there is not a perfect correlation between wealth and income.

Question 3

what are injections?

Answer 3

Injections are monetary additions to the economy:
o government spending (G),
o investment (I)
o exports (X).

Question 4

what are leakages?

Answer 4

Withdrawals or leakages are where money is removed from the economy:
o taxes (T)
o savings (S)
o imports (M).

Question 5

what is the equilibrium position of real output?

Answer 5

The equilibrium position of national output is where the AD and AS curves intersect. If either AS or AD are shifted, then the equilibrium position will change. The size of this change will depend on the size of the shift and the elasticity of the curve which has not moved i.e. the elasticity of AS if AD has moved.

Question 6

what is the multiplier ratio/effect?

Answer 6

The multiplier process is the idea that an increase in AD because of an increased injection (exports, government spending or investment) can lead to a further increase in national income.
It is the ratio of the final change in income to the initial change in injection

Question 7

what is the process of the multiplier?

Answer 7

The multiplier effect occurs when there is new demand in an economy. This leads to an injection of more income into the circular flow of income.
The initial injection will represent an increase in spending and will increase income for
someone else which will then lead to further consumption spending.
The extra consumption creates more jobs and increases output.

Question 8

what is the size of the multiplier determined by?

Answer 8

marginal propensity to consume (MPC)

The multiplier is able to work due to the concept of circular flow, since one person’s spending is another’s income

Question 9

what is a negative multiplier effect?

Answer 9

a withdrawal from the economy
could lead to an even further fall in income, decreasing economic growth and possibly leading to a decline in the economy. This means that government plans to
cut deficits will lead to an even further decrease of the economy.

Question 10

what is the multipliers effect on the economy?

Answer 10

The multiplier means that growth can occur quicker , as any injections lead to a bigger increase in national income. Injections can be targeted at those with the biggest MPC (those on low incomes) in order to increase the size of the multiplier.
As with many things in macroeconomics, there will also be a time lag between the increase in income and the full effect of that increase as not everyone will spend the money straight away.
The overall effect on the economy will depend on the change in AD and the elasticity
of the AS curve.

Question 11

what is the marginal propensity to consume? (MPC)

Answer 11

The increase in consumption following an increase in income

Question 12

what is the marginal propensity to save?

Answer 12

The increase in savings following an increase in

income

Question 13

what is the marginal propensity to withdraw?

Answer 13

The increase in leakages following an increase

in income MPW=MPS+MPT+MPM

Question 14

how do you work out the multiplier?

Answer 14

Multiplier= 1 = 1

(1-MPC) MPW

Question 15

what is the effects of MPT, MPM, MPS on MPC

Answer 15

The other marginal propensities show how much of a change in income is withdrawn
from the economy i.e. how much is not spent. An increase in any of these will decrease the MPC.

Question 16

what effects does the multiplier have on AD?

Answer 16

The multiplier leads to an increase in AD higher than the original increase but for it to have the desired effect, there must be sufficient spare capacity in the economy (i.e. it cannot be at full output) for extra output to be produced.
It has little effect on output when there is little
spare capacity in the economy so the rising demand only creates rising prices.