National Income: How is it spent?

Question 1

What are the Determinants of expenditure?

Answer 1

GDP = C, I, G, NX

Question 2

What defines a closed economy

Answer 2

All activity within the closed boarders of an economy, excluding NX and Capital flows.

Question 3

What components of expenditure are measured in a closed economy?

Answer 3

C, I, G

Question 4

What is the definition of disposable income?

Answer 4

Disposable income is the amount of income households have left after paying direct taxes (like income tax and national insurance).

Question 5

What is the function for disposable income?

Answer 5

Y-T

Question 6

What income do households receive and how is it earned?

Answer 6

Wages – for supplying labour

Rent – for supplying land

Interest – for supplying capital

Profit – for supplying enterprise

Question 7

What does Y stand for?

Answer 7

Total Income

Question 8

What does T stand for?

Answer 8

Total direct taxes

Question 9

What is the money the households use to consume goods and services within the boarders of an economy?

Answer 9

Disposable Income
Y-T

Question 10

What is MPC?

Answer 10

Marginal Propensity to Consume.

Question 11

Define MPC

Answer 11

The MPC is the proportion of additional (extra) income that a household spends on consumption rather than saving.

Question 12

What is the formula for MPC (How is it calculated)

Answer 12

MPC=ΔY/ΔC​

Where:
ΔC = Change in consumption
ΔY = Change in income

Question 13

How is Household behavior represented in terms of consumption?

Answer 13

Through the consumption function
C=C(Y-T)

Question 14

What is assumed that households do not do to consume ?

Answer 14

Households do not borrow to consume — they only spend what they earn as disposable income.

Question 15

What is the saving function?

Answer 15

S = (Y-T) - C

Question 16

What does the saving function show?

Answer 16

The saving function shows the relationship between saving (S) and disposable income (Yᴅ).

Question 17

If the household saving increases what happens to the households MPC?

Answer 17

The MPC falls

Because if households are saving more out of every extra £1 they earn, then they are spending less. That’s exactly what a lower MPC means.

Question 18

Why might households save more?

Answer 18

Due to higher interest rates, economic uncertainty, future income expectations, policy changes, or cultural habits.

Question 19

What is the Income Function?

Answer 19

TI-TT

Question 20

As household income increases, does MPC increase at the same rate?

Answer 20

MPC usually decreases as income increases.

The richer you get, the smaller the proportion of extra income you spend on consumption.

Question 21

Is MPC higher or lower for households with less income?

Answer 21

Higher — because they spend a bigger share of any extra income to meet basic needs.

Question 22

What does the MPC measure mathematically?

Answer 22

The MPC measures the derivative of the consumption function.

Question 23

What types of firms do firms invest in?

Answer 23

Tangible and Intangible

Question 24

What is a tangible asset and examples?

Answer 24

Physical items firms invest in, like machines, buildings, and vehicles.

Question 25

What are intangible assets and examples?

Answer 25

Non-physical investments like patents, software, and brand value.

Question 26

What is the Investment Function?

Answer 26

I = I(r)

Question 27

What does r stand for?

Answer 27

The real Interest rate

Question 28

What is the definition of the real interest rate?

Answer 28

The nominal interest rate adjusted for inflation — shows the true cost of borrowing or true return on saving in terms of purchasing power.

Question 29

Define Nominal interest rate

Answer 29

The advertised interest rate, not adjusted for inflation.

Question 30

What is the formula for the real interest rate?

Answer 30

(R)=Nominal Interest Rate−Inflation Rate

Question 31

What is a firms investment behavior represented through?

Answer 31

The investment function I = I(r)

Question 32

Do households or firms invest in tangible or Intangible assets?

Answer 32

Firms invest in the assets however households own the firms

Question 33

What does the real interest rate (r) show firms and represent?

Answer 33

The real cost of borrowing and The opportunity cost of using funds

Question 34

What is the real cost of borrowing?

Answer 34

When a firm borrows money to invest, it's taking a risk — it could have used that money elsewhere (or not borrowed at all).

Question 35

If the interest rate increases, what happens to investment?

Answer 35

Investment decreases because borrowing is more expensive, and the return on investment must now be higher to justify the cost.

Question 36

What does the investment function I = I(r) show?

Answer 36

It shows that investment depends on the real interest rate. As r increases, investment I falls — due to higher borrowing costs and opportunity costs.

Question 37

What does G stand for?

Answer 37

Government spending on goods and services

Question 38

What does government spending G exclude in consumption function?

Answer 38

Transfer payments

Question 39

What does endogenous mean?

Answer 39

Endogenous variables are determined inside the model. They are affected by other variables within the system.

Question 40

What does exogenous mean?

Answer 40

Exogenous variables come from outside the model. They are set independently and not explained by the model itself.

Question 41

What’s the difference between endogenous and exogenous variables?

Answer 41

Endogenous variables are explained by the model (they change within it). Exogenous variables are given to the model from the outside (they’re fixed or assumed).

Question 42

What does it mean that government spending and total taxes are exogenous variables?

Answer 42

It means they are determined outside the model and are taken as fixed or given values.

Question 43

Is investment endogenous or exogenous?

Answer 43

endogenous — it depends on factors like the real interest rate (r) and business expectations. I=I(r)

Question 44

Is consumption endogenous or exogenous?

Answer 44

Endogenous — it depends on disposable income: C=(Y−T)

Question 45

Is government spending endogenous or exogenous?

Answer 45

Exogenous — it’s set by the government and assumed fixed in basic models. It does not change automatically with income.

Question 46

What is a budget surplus?

Answer 46

A budget surplus occurs when:T>G (Saving more than spending) Surplus = T−G = Positive public saving

Question 47

What is a budget deficit?

Answer 47

A budget deficit occurs when:T

Question 48

What is a balanced budget?

Answer 48

A balanced budget occurs when:T=G Public saving = 0 (No surplus or deficit)

Question 49

What are fiscal accounts?

Answer 49

Fiscal accounts record the government’s income and spending. They include tax revenues, government expenditure, budget surpluses/deficits, public debt and Wealth Transfers.

Question 50

What are national accounts?

Answer 50

National accounts record the economic activity of the entire country. They include GDP, national income, consumption, investment, government spending, exports, and imports.

Question 51

What does the national account measure?

Answer 51

Used to measure overall economic performance.

Question 52

What does the fiscal account measure?

Answer 52

Used to manage fiscal policy and measure how the government is affecting the economy.

Question 53

Are wealth transfers like social security included in national accounts?

Answer 53

No — wealth transfers are not included in national accounts. They are non-productive transfers of money - Included in fiscal accounts.