National Income

Question 1

What’s the circular flow of income?

Answer 1

Where firms and households interact and exchange resources in an economy

Question 2

How do firms and households interact?

Answer 2

• households supply firms with the FOPs and in return they get wages etc.
• firms supply goods and services to households- consumers pay firms for these

Question 3

What 3 national things are equal?

Answer 3

• national income
• national expenditure
• national output

Question 4

What’s a withdrawal from the circular flow?

Answer 4

When money is removed

Question 5

What’s an injection into the circular flow?

Answer 5

When money is added

Question 6

3 examples of withdrawals

Answer 6

• savings
• taxes
• Imports

Question 7

3 Examples of injections

Answer 7

• investment
• gov spending ( on welfare payments, public and merit goods )
• exports

Question 8

When rate of withdrawals = rate of injections

Answer 8

The economy is at a state of equilibrium

Question 9

Define income

Answer 9

A flow of money that goes to the FOPs:
- eg. Wages, welfare payments, profits, dividends, rent, interest

Question 10

Define wealth

Answer 10

A stock of assets:
- eg. Savings, shares, property, bonds and pension schemes

Question 11

At a price above equilibrium what will be in excess?

Answer 11

Supply

Question 12

At a price below equilibrium what will be in excess?

Answer 12

Aggregate demand

Question 13

When will supply shift to the right?

Answer 13

• economy becomes more productive
• increase in efficiency

Question 14

When will AD shift in?

Answer 14

• firms have less confidence
• recession

Question 15

What is the multiplier ratio?

Answer 15

• The ratio of the rise of national income to the initial rise in AD
• the number of times. A rise in national income is larger than the rise in the initial injection of AD, which led to rise in national income is larger

Question 16

When does the multiplier effect occur?

Answer 16

When there’s new demand in the economy

Question 17

What does the multiplier affect lead to?

Answer 17

• injection of more income into the circular flow of income - leads to growth
• more jobs created
• higher average incomes
• more spending
• more income

Question 18

Why does the multiplier effect occur?

Answer 18

Since ‘one persons spending is another persons income’

Question 19

The ME refers to how an increase in AD leads to what?

Answer 19

An even bigger increase in national income

Question 20

What are the 4 marginal propensities?

Answer 20

• MPC ( consume )
• MPS ( save )
• MPT ( tax )
• MPM ( import )

Question 21

If the MPC is higher is the multiplier bigger or smaller?

Answer 21

Bigger

Question 22

How can the gov influence MPC?

Answer 22

• change rate of direct tax
• causes more disposable income

Question 23

How can the gov influence MPC?

Answer 23

• change rate of direct tax
• causes more disposable income

Question 24

MPC + MPS =

Answer 24

1

Question 25

When will the multiplier be small?

Answer 25

If consumers save more than they spend

Question 26

When will the multiplier be small?

Answer 26

If consumers save more than they spend

Question 27

What is the MPT?

Answer 27

The proportion of each pound taxed by gov

Question 28

If tax is high what happens to the multiplier

Answer 28

Gets smaller

Question 29

When will the multiplier get smaller (MPM)

Answer 29

If consumers spend income on imports rather than domestic goods and services

Question 30

2 formulae to calculate multiplier

Answer 30

1/ (1-MPC) 1/MPW

Question 31

How to calculate MPW?

Answer 31

MPS + MPT + MPM

Question 32

What is a reverse multiplier?

Answer 32

- a withdrawal of income could lead to an even larger decrease in income for the economy - leads to decreased growth an potential decline

Question 33

Extra output can be produced quickly and cheaply when…

Answer 33

Economy has lots of spare capacity

Question 34

When AS is elastic will the multiplier increase or decrease

Answer 34

Increase

Question 35

A small increase in AD leads to what size increase in national income?

Answer 35

Large

Question 36

A small increase in AD leads to what size increase in national income?

Answer 36

Large

Question 37

How is capacity shown on the Keynesian curve?

Answer 37

- vertical section is perfectly inelastic with no spare capacity - horizontal section is perfectly elastic with lots of spare capacity

Question 38

If AS is inelastic will the multiplier bee bigger or smaller than its potential?

Answer 38

Smaller because if AD increases price increases and the increase in output wont be as significant