National income and macroeconomic equilibrium

Question 1

What two things flow from households to firms in the circular flow of income, expenditure and output?

Answer 1

• expenditure on goods and services
• factors of production

Question 2

What two things flow from firms to households in the circular flow of income, expenditure and output?

Answer 2

• goods and services
• factor incomes

Question 3

What does the circular flow of income, expenditure and output model of households and firms only ignore that makes it too simplistic?

Answer 3

• government
• international trade
• flow between firms
• saving

Question 4

In the expandedcircular flow of income, expenditure and output model, what three items are classed as withdrawals?

Answer 4

savings, taxation, imports

Question 5

In the expandedcircular flow of income, expenditure and output model, what are classed as injections?

Answer 5

investment, government spending, exports

Question 6

Define* income*

Answer 6

earnings during a period

Question 7

Define wealth

Answer 7

accumulated assets built up from past income

Question 8

Give some figures indicating distribution of wealth in UK

Answer 8

• wealthiest 10% hold about 40% of wealth
• least-wealthy 50% hold about 10% of wealth

Question 9

In the UK, which is more unevenly distributed - income or wealth?

Answer 9

wealth

Question 10

Why does unevenly distributed wealth lead to unevenly distributed income?

Answer 10

because wealth creates an income so wealthiest get more income

Question 11

What is equal in macroeconomic equilibrium?

Answer 11

aggregate supply and aggregate demand

Question 12

Define multiplier

Answer 12

ratio of a change in equilibrium real income to the autonomous change that brought it about

Question 13

What is the formula for the multiplier?

Answer 13

1 / mpw

Question 14

What does the size of the *multiplier *depend on?

Answer 14

size of leakages and withdrawals in the form of savings, imports, direct taxes

Question 15

Will higher imports reduce or increase the multiplier?

Answer 15

reduce

Question 16

Will higher saving reduce or increase the multiplier?

Answer 16

reduce

Question 17

Define the marginal propensity to import (mpm)

Answer 17

proportion of additional income that is spent on import of goods and services

Question 18

Define the marginal propensity to withdraw (mpw)

Answer 18

proportion of additional income that is withdrawn from the circular flow

Question 19

What is the formula for the marginal propensity to withdraw (mpw)

Answer 19

mpw = mps + mpm + mpt

Question 20

Define the marginal propensity to tax (mpm)

Answer 20

proportion of additional income that is taxed

Question 21

What is the formula linking marginal propensity to consume and marginal prepensity to withdraw?

Answer 21

mpc = 1 - mpw

Question 22

If domestic supply is unelastic, what effect will this have on the multiplier?

Answer 22

reduced multiplier as more spent on imports