Theme 2 - The UK economy - Performance and Policies (2.4 - National Income)

Question 1

Define the Circular Flow of Income [1]

(Macroeconomics Pack 1 - Page 2)

Answer 1

A model of the economy which shows a continuous flow of goods, services and money between households and firms [1]

Question 2

State 3 factors which can inject money into the circular flow of income [3]

(Macroeconomics Pack 1 - Page 2)

Answer 2

1. Business Investment (I)
2. Government Spending (G)
3. Exports (X)

Question 3

State 3 factors which can withdraw money from the circular flow of income [3]

(Macroeconomics Pack 1 - Page 2)

Answer 3

1. Savings (S)
2. Taxations (T)
3. Imports (M)

Question 4

Define Income [1]

(Macroeconomics Pack 1 - Page 3)

Answer 4

A flow of money acting as a reward for a service of production [1]

Question 5

Define Wealth [1]

(Macroeconomics Pack 1 - Page 3)

Answer 5

The value of the stock of assets held by an individual/organization [1]

Question 6

Describe what is meant by the wealth effect. [3]

Ref - 2.4.1 - National Income

Answer 6

• An increase in the price of assets [1]
• makes the owner feel richer [1]
• therefore they are more likely to increase consumption. [1]

Question 7

What is meant by the Multiplier Effect? [2]

Ref - 2.4.4 - The Multiplier

Answer 7

An increase in injections into a circular flow of income, [1] will cause a greater increase in the output of money. [1]

Question 8

How would you calculate the marginal propensity to save (MPS)? [1]

Ref - 2.4.4. - The Multiplier

Answer 8

Change in Saving [1] / Change in Y [1]

Question 9

How would you calculate the marginal propensity to consume (MPC)? [1]

Ref - 2.4.4. - The Multiplier

Answer 9

Change in C [1] /
Change in Y [1]

Question 10

Describe an example of the Multplier Effect in real life. [4]

Ref - 2.4.4. - The Multiplier

Answer 10

If firms successfully expand [1], there should be more profit to increase working hours, therefore wages. [1] An increase in wages increases consumption [1], which will generate more profit for other firms to expand. [1]

Question 11

What are the 5 marginal propensities used to calculate the multiplier? [5]

Ref - 2.4.4. - The Multiplier

Answer 11

1. Marginal Propensity to Save (MPS) [1]
2. Marginal Propensity to Consume (MPC) [1]
3. Marginal Propensity to Tax (MPT) [1]
4. Marginal Propensity to Import (MPM) [1]
5. Marginal Propensity to Withdraw (MPW) [1]

Question 12

State the formulas used to calculate the multiplier [2]

Ref - 2.4.4. - The Multiplier

Answer 12

1
______

1-(MPC)

OR

1
_______________________
(Withdrawals from circular flow)

Question 13

Evaluate the Keynesian model in a Long-Run Equilibrium, in terms of increasing AD. [2]

Ref - 2.4.3 - Macroeconomic Equilibrium

Answer 13

An increase in AD when an economy has spare capacity will only impact Real GDP. [1]
An increase in AD when an economy has little capacity will impact the price level. [1]