Theme 2.4 Flashcards
What is the circular flow of income?
The interaction and exchange of resources between firms and households in an economy.
What do households supply to firms?
Factors of production such as labour, land, capital, and enterprise.
What do households receive in return from firms?
Wages, rent, dividends, and profit.
What do firms supply to households?
Goods and services.
What is represented by the equation national income = national output = national expenditure?
The circular flow of income.
What is a withdrawal in the circular flow of income?
Saving income or taxes that remove money from the circular flow.
What is an injection in the circular flow of income?
Investment or government spending that adds money to the economy.
What is the effect of exports in the circular flow of income?
Exports are an injection as they generate revenue from foreign countries.
What is the effect of imports in the circular flow of income?
Imports are a withdrawal as money leaves the country.
What condition indicates economic equilibrium in the circular flow of income?
The rate of withdrawals equals the rate of injections.
Define income in economic terms.
A flow of money to the factors of production.
Define wealth in economic terms.
A stock of assets such as savings, shares, and property.
What happens when there are net injections into the economy?
There will be an expansion of national output.
What happens when there are net withdrawals from the economy?
There will be a contraction of production and output decreases.
What does equilibrium real national output indicate?
The point where AD equals AS.
What is the result of increased productivity in the economy?
Supply shifts to the right, lowering the average price level and increasing national output.
What occurs when firms lack confidence or during a recession?
AD may shift inwards, causing a fall in price level and national output.
How is the multiplier ratio defined?
The ratio of the rise in national income to the initial rise in AD.
What is the multiplier effect?
An initial increase in AD leads to a larger increase in national income.
What does the marginal propensity to consume (MPC) represent?
The proportion of each additional pound of household income that is spent.
What is the relationship between MPC and the size of the multiplier?
The higher the MPC, the larger the size of the multiplier.
What is the marginal propensity to save (MPS)?
The proportion of each pound that is saved by consumers.
What is the formula relating MPC, MPS, MPT, and MPM?
MPS + MPT + MPM = 1.
What is the marginal propensity to tax (MPT)?
The proportion of each pound taxed by the government.
What is the marginal propensity to import (MPM)?
The proportion of household income spent on imports.
How is the multiplier calculated in an open economy?
1/(1-MPC) or 1/MPW.
What is the significance of the multiplier when there is spare capacity?
A small increase in AD leads to a large increase in national income.
What happens if AS is inelastic when AD increases?
Prices increase and the increase in output is not significant.
What is a ‘reverse’ multiplier?
A withdrawal of income that leads to a larger decrease in income for the economy.
