Theme 2: National Income Flashcards
What do households supply firms with?
The factors of production in return for wages, rent dividends and profit.
National income equals…?
national output and national expenditure
What are the 3 examples of withdrawals from the economy?
- savings
- taxes
- exports
What are the 3 examples of injections into the economy?
- Investment
- government spending
- imports
When is the economy in equilibrium?
When the rate of withdrawals = the rate of injections
Income
The flow of money that goes to the factors of production.
Wealth
Stock of assets.
What is the impact of a net increase in injections on the circular flow of income?
Expansion of national output
What is the impact of a net increase in withdrawals on the circular flow of income?
Contraction of production, so output decreases
Multiplier ratio
Ratio of the rise 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.)
The multiplier process
How an initial increase in AD leads to an even bigger increase in national income.
How can the government impact the MPC?
By changing the rate of direct tax. As if consumer have more disposable income due to lower income tax rates their propensity to consume might increase.
What is the impact of Marginal Propensity to Save (MPS) on the multiplier?
the increase in household savings when disposable income rises by £1
What is the impact of Marginal propensity to tax on the multiplier?
The proportion of each pound taxes by the government. The higher the rate of tax, the less disposable income each consumer has and the smaller the size of the multiplier.
What is the impact of Marginal propensity to import on the multiplier?
If consumers spend income on imports rather than domestic goods and services, income is withdrawn from the circular flow of income. This reduces the size of the multiplier.
