National Income Flashcards
Injections to the circular flow of income
Government spending, investment, exports
Withdrawals from the circular flow of income
Taxes, savings, imports
Classic LRAS and AD
As LRAS is perfectly inelastic, a shift in AD will increase price/output in the short-run but in the long-run output won’t change only inflation
Keynesian LRAS and AD
Impact of a shift in AD depends on elasticity of curve - during a recession output low so government should try increase AD
Investment effect
Investment increases AD, but also increases LRAS as firms use machinery to increase production
Multiplier
An initial injection into the economy leading to a further increase in income/growth
What is the correlation between MPC and the multiplier?
Greater the MPC, greater the size of the multiplier
What is the issue with the multiplier?
Can also have a negative multiplier
Multiplier effect on economy
Quicker growth, can also target those on lower incomes to boost MPC - but has a time lag
MPM
Marginal propensity to import
What is the circular flow argument,?
One person’s consumption is another’s income
What is a rise in income’s effect on all marginal propensities?
All increase, but lower income rise will increase MPC more and higher income rise will increase MPS more
What is MPW?
Marginal propensity to withdraw ( MPW = MPS+MPT+MPM)
Multiplier calculation
1 divided by 1- MPC or 1 divided by MPW
What are the conditions for a multiplier to work?
Multiplier only works if there is sufficient spare capacity - if not just causes inflation - greater spare capacity , more elastic so less price change and more output change