Theme 2: 2.4 National income

Question 1

what does the circular flow diagram show?

Answer 1

its a simplified model of the economy
flows demonstrate 3 measures of economic activity :
-income firms pay out 
-total amount of output produced
-total expenditure

Question 2

what is the difference between a withdrawal and an injection?

Answer 2

withdrawal is where money flows out of the circular flow and an injection is where money flows into the circular flow

Question 3

injection information

Answer 3

-includes investment, government expenditure, exports from overseas and expenditure from overseas

Question 4

withdrawal information

Answer 4

-includes household savings, taxes received by the government from households, income spent on G/S overseas

Question 5

when is the economy in equilibrium?

Answer 5

when planned injections are equal to planned withdrawals (if one is greater than the other the economy contracts)

Question 6

difference between income and wealth.

Answer 6

income is the flow of money during a period whereas wealth is the accumulation of assets

Question 7

what is the wealth effect?

Answer 7

when prices rise and the value of assets increase

Question 8

what is equilibrium real national output?

Answer 8

the price level and real output where AD is equal to AS (intersection of AS/AS curves)

Question 9

what can disrupt equilibrium national output?

Answer 9

an exogenous shock will cause a change by shifting or(or both) curves (normally shown on SRAS graph)
these changes may offset over time in the long run

Question 10

what the multiplier effect causes

Answer 10

it causes gains in total output to be greater than the change in spending that caused

Question 11

multiplier definition

Answer 11

the ratio of a change in equilibrium real income to the autonomous change that brought it about; it is defined as 1 divided by the MPW

Question 12

MPC

Answer 12

marginal propensity to consume

-the proportion of additional income devoted to consumer expenditure

Question 13

MPM

Answer 13

marginal propensity to import

-the proportion of additional income that is spent on imported G/S

Question 14

MPT

Answer 14

marginal propensity to tax

-proportion of additional income that is taxed

Question 15

MPW

Answer 15

marginal propensity to withdraw-the sum of the MPS,MPM,MPT

Question 16

multiplier formula

Answer 16

1/MPW OR 1/1-MPC

Question 17

MPC+MPW equals what?

Answer 17

1

Question 18

what are the effects of the multiplier on the economy?

Answer 18

-growth can occur quicker(can be targeted at those with the largest MPC)

-impossible for the gov to know the exact effect of their spending

Question 19

what is the multiplier for developed and developing countries?

Answer 19

developed-1.5
developing-1.6