National Income

Question 1

What is national income?

Answer 1

National income is the amount received by various agents in the economy, by households, firms and government.
National income is a flow of money, i.e. a movement of money from one person to another rather than a stock of money, such as saving in a bank, physical assets such as buildings or shares.

Question 2

What are leakages?

Answer 2

Leakages, also known as withdrawals, are an exit from the circular flow of money, comprising of saving, taxation and money spent on imports.

Question 3

What is an asset?

What is wealth?

Answer 3

An asset is an accumulation of wealth; factors which can be used to provide income in the future.
Wealth is a stock of assets, e.g. factories or land.

Question 4

Why is there a strong correlation between income and wealth?
What is income?
What are collateral assets?

Answer 4

The ownership of wealth in itself can mean that there are interest payments or rent. When there is a change in wealth, e.g. house prices rise or fall, there is an impact on people’s spending and therefore a change in people’s income.
Income is a flow of money e.g. wages.
Collateral assets are used as security for a loan.

Question 5

What are injections? (3)

Answer 5

Injections are an input into the circular flow of money, these inputs comprise:
Investment (I)
Government spending (G)
Export income (X)

Question 6

What are the withdrawals?

Answer 6

1) Savings (S) - less spending in the current time period.
2) Tax (T) - when government demands money through tax, consumers are unable to spend it.
3) Imports (M) - when goods are bought from abroad, money flows out of the country.

Question 7

What is the equilibrium?

Answer 7

The equilibrium is the point at which aggregate demand meets aggregate supply, which tells us the price level and real GDP of a country.
An equilibrium is a point where there is no tendency for the level of output or price level to change.

Question 8

What would happen if prices were higher or lower than the equilibrium?

Answer 8

If prices were higher then the equilibrium, there would be tendency for them to fall, because there would be excess supply and therefore, lots of unsold goods and services.
If prices were lower than the equilibrium, there would be a tendency for them to rise, because there would be excess demand, and so price rise would ensure that everyone gets what they are prepared to pay for.

Question 9

What happens in terms of inflation and growth when AD shifts to the right?
What is the effect of the elasticity of the AS curve?

Answer 9

When AD shifts to the right, there would be an increase in the equilibrium price level, i.e. inflation and increase in growth, i.e. an increase in real national output.
The more elastic the AS curve, the more the effect is seen on the growth axis rather than the price axis. If AS is perfectly inelastic, there will be no effect on output at all, just an increase in price.

Question 10

What happens in terms of growth and price when AS shifts to the right?What is the effect of the elasticity of the AS curve?

Answer 10

When AS shifts to the right, we would expect there to be a decrease in the equilibrium price level, i.e. deflation, and an increase in growth, i.e. increase in real output.
If AS is perfectly elastic, there will be no impact on output or prices at all. The only effect would be an increase in the output gap.

Question 11

What is the multiplier?

Answer 11

The multiplier shows the amount by which a change in an injection or leakage causes total spending to change.

Question 12

What will be the effect of an increase in injections on total spending?
How can the final change to spending be calculated?

Answer 12

If the injections to the circular flow increase, then there will be a larger final change on total spending in the economy.
The multiplier times the injection gives the final change in spending.

Question 13

How do leakages affect the multiplier?

Answer 13

If the leakages from the circular flow increase, then the multiplier effect will be smaller.

Question 14

What is MPC?

In macroeconomic terms if the MPC is 0.5, what does this mean?

Answer 14

MPC is marginal propensity to consume.

In Macroeconomic terms that means that 50% of any extra injection will be re-spent in the economy.

Question 15

What is MPS?

How does this affect the multiplier?

Answer 15

MPS is marginal propensity to save.

The multiplier falls, when marginal propensity to save rises.

Question 16

What is MPT and how does it affect the multiplier?

Answer 16

The higher the marginal propensity to tax, the lower the multiplier ratio.

Question 17

What is MPM and how does this affect the multiplier?

Answer 17

MPM is the marginal propensity to import, the effect of this is to reduce the value of the multiplier.

Question 18

How is the multiplier calculated?

Answer 18

The multiplier = 1/ (1-MPC)

Question 19

What is the multiplier process?

Answer 19

The multiplier process means that the effect of a new injection on the economy will have a magnified impact on total expenditure in the economy. The increase in total expenditure depends how much is left for spending in the economy once all the leakages have been taken out.

Question 20

How can changes in the economy such as recession or boom effect the multiplier?

Answer 20

During an economic recession there is less spending in the economy which will lead to a reduction in the multiplier.
During an economic boom, there is increased spending which will lead to a rise in the multiplier.