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

“When withdrawals are greater than injections”…… [1]

Ref - 2.4.1 - National Income

Answer 4

“……Real GDP will fall”. [1]

Question 5

Describe how the circular flow of income operates [4]

Ref - 2.4.1 - National Income

Answer 5

• Households gain income as a reward for their services. [1]
• Income is spent on firms’ G+S [1]
• Firms now have more money to pay more incomes. [1]
• Money continues to flow around the circular flow. [1]

Question 6

Define Income [1]

(Macroeconomics Pack 1 - Page 3)

Answer 6

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

Question 7

Define Wealth [1]

(Macroeconomics Pack 1 - Page 3)

Answer 7

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

Question 8

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

Ref - 2.4.1 - National Income

Answer 8

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

Question 9

Describe the relation between income and wealth [2]

Ref - 2.4.1 - National Income

Answer 9

High levels of income can allow an increase in wealth [1] as assets such as shares can be bought, bringing in more income. [1]

Question 10

What is meant by the Multiplier Effect? [2]

Ref - 2.4.4 - The Multiplier

Answer 10

Any increases/changes in AD [1] will cause an even greater change in national output. [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) [1]

OR

1/MPW [1]

Question 13

How would you calculate all of the marginal propensities? [2]

Ref - 2.4.4. - The Multiplier

Answer 13

e.g. To calculate MPI/MPW
- Change in (imports/withdrawals) [1]
- divided by change in income [1]

Anything similiarly related.

Question 14

State 3 ways in which the multiplier effect can be caused. [3]

Ref - 2.4.4. - The Multiplier

Answer 14

Increases in:
- Injections [1]
- Exports [1]
- Government spending [1]

Question 15

Describe an example of the multiplier effect IRL, referring to the 3 causes of the multiplier. [5]

Ref - 2.4.4. - The Multiplier

Answer 15

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] meaning national output rises at a greater rate. [1]