National income

Question 1

What is the circular flow of income?

Answer 1

Economic model that illustrates money flow into an economy

Question 2

What do injections do?

Answer 2

Injections add money to the circular flow of income and increase it’s size.
- Increased government spending (G)
- Increased investment (I)
- Increased exports (X)

Question 3

What do withdrawals/leakages do?

Answer 3

Withdrawals/leakages remove money from the circular flow of income
- Increased savings by households (S)
- Increased taxation by government (G)
- Increased import purchases (M)

Question 4

Injections > Withdrawals =

Answer 4

Economic growth

Question 5

Withdrawals > Injections =

Answer 5

Fall in economic growth

Question 6

What is the multiplier process?

Answer 6

Idea that one individuals spending is another’s income.

Question 7

What is the multiplier formula for marginal propensity to consume?

Answer 7

1/1-(MPC)

= Injections

Question 8

What is the multiplier formula for marginal propensity to withdraw

Answer 8

1/(MPS+MPM+MPT)

MPS- Marginal propensities to save
MPM-Marginal propensities to import
MPT-Marginal propensities to tax

All added together = MPW (Total withdraws)

so, 1/(MPW)

Question 9

What is the multiplier ratio ?

Answer 9

Quantifies the total change in national income resulting from an initial change in spending.
demonstrates how initial spending generates further income and consumption, leading to a multiplied effect on the overall economy.

Question 10

The multiplier process:

Answer 10

Initial Spending: An initial increase in spending (e.g govt spending , export demand) injects money into the economy.

Income generation: This spending becomes income for households and firms, who then spend a portion of this income.

Secondary Spending: The subsequent spending generates additional income for others, continuing the cycle.

Diminishing Returns: Each round of spending is smaller due to withdrawals (savings, taxes, imports), eventually tapering off.

Question 11

Effects of the Multiplier on the Economy:

Answer 11

Expansions:
-The multiplier amplifies the effects of initial spending increases, leading to greater overall economic growth.
-Job Creation: Increased demand for goods and services requires more labour, reducing unemployment.
-Income Growth: Higher demand raises incomes, enhancing living standards.

Contractions:
Conversely, a reduction in spending can have a multiplied negative impact, leading to deeper recessions.
Increased Unemployment: Lower demand reduces the need for labor, increasing unemployment.
Decreased Income: Reduced economic activity leads to lower incomes and consumption.