THEME 2 - Topic 5 - National Income + Macroeconomic Equilibrium

Question 1

Define the circular flow of income, expenditure and output

Answer 1

Is a model of an economy showing the movement of goods and services between households and firms and their corresponding payments in money terms.

Question 2

Explain the 2nd paragraph (closed system) describing the circular flow of income

Answer 2

The 2 sector model (closed system), involves households and firms. Households provide factor services (factors of production to firms), in return, firms provide households with factor income (wage, rent, interest, profit). Households also spend on firms (expenditure), and firms provide households with an output.

Question 3

Explain the 3rd paragraph of describing the circular flow of income open system

Answer 3

Another sector includes the govemment, into the three model sector. Both households and firms pay taxation to the government (withdrawal). Governments will spend on households and firms (injection).

Question 4

Explain the 4th paragraph of describing the circular flow of income

Answer 4

The four sector model introduces the financial sector. Households will save into this sector (withdrawal). Subsequently, the finance sector will invest into firms (injection).

Question 5

Explain the 5th paragraph of describing the circular flow of income

Answer 5

Finally, the five sector model introduces the international trade sector into the economy. Firms can export to the international trade sector (injection), or import from (withdrawal). Households
will also interact, importing from international trade sector (withdrawal) from the economy.

Question 6

Define a withdrawal

Answer 6

Is where money flows out of the circular flow in the form of savings, taxation and imports thereby reducing aggregate demand.

Question 7

Define an injection

Answer 7

Is where money flows into the circular flow in the form of investment, government expenditure and exports thereby increasing aggregate demand.

Question 8

Name the 5 sectors of the circular flow of income

Answer 8

Households
Firms
Government
Finance sector
International trade

Question 9

Define macroeconomic equilibrium

Answer 9

Occurs where aggregate demand equals aggregate supply and real national output is not changing.

Question 10

What is the first section of describing an increase in SRAS?

Answer 10

The original equilibrium is at E. Following an increase in short-run aggregate supply, the SRAS curve shifts rightwards from SRAS TO SRAS1.

Question 11

What is the second section of describing an increase in SRAS?

Answer 11

Subsequently, real national output/ real GDP increases from Y to Y1, representing actual economic growth, and potentially unemployment has fallen.

Question 12

What is the third section of describing an increase in SRAS?

Answer 12

Also, the average price level has fallen from P to P1, representing a fall in cost-push inflationary pressure.

Question 13

What is the fourth section of describing an increase in SRAS?

Answer 13

Finally, as the average price level falls, exports appear more competitive, whilst imports appear less competitive, leading to net exports increasing and the current account of the balance of payments improves. There has been an extension in aggregate demand. The new equilibrium is at E1.

Question 14

Define multiplier

Answer 14

The ratio of change in equilibrium real income to the autonomous change that brought it about; it is defined a 1 divided by the marginal propensity to withdraw (MPW).

Question 15

Define the multiplier effect

Answer 15

Is the process by which any change in a component of aggregate demand results in a greater final change in real national output.

Question 16

Define marginal propensity to consume (MPC).

Answer 16

Is the proportion of an increase in disposable income that households would devote to consumption.

Question 17

Define marginal propensity to save (MPS).

Answer 17

Is the proportion of additional income that is saved.

Question 18

Define marginal propensity to tax (MPT).

Answer 18

Is the proportion of additional income that is taxed.

Question 19

Define marginal propensity to import (MPM)

Answer 19

The proportion of additional income that is spent on imported goods and services.

Question 20

Define marginal propensity to withdraw (MPW)

Answer 20

Is the proportion of additional income that is withdrawn from the circular flow of income - it is the sum of the marginal propensities to save, tax and import.

Question 21

Give the formula for the multiplier

Answer 21

K = 1/MPW

Question 22

Define income

Answer 22

Income is a flow concept and is the amount of income that is earned during a period of time.