Y1 assessment- circular flow of income Flashcards

1
Q

Flows

A

Physical- ‘real things’ land, labour, capital, goods services (straight arrows)

Monetary- money used to pay for real things (curved arrows)

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2
Q

Injections + Withdrawals

A

-Circular flow suggests as long as households keep spending what they earn (fixed savings ratio), and firms spend revenues on production the national output wont change

-Injections in the form of exports, investment and gov spending go directly to firms
(higher than output -> output increases)

-Withdrawals come in the form of imports, savings and taxes, made by either firms or households (if output greater than expenditure -> output reduces)

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3
Q

Multiplier Effect

A

-States that when an injection is made into the circular flow the actual change in national income is greater than initial injection

-Size of multiplier affected by leakages (how fast money leaves the system), therefore smaller

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4
Q

Components of AD

A

C - Consumption
I- Investment
G- Government Spending
(X-M)- Exports- Imports

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5
Q

Determinants of Consumption and Saving (65%)

A

-Income
-Interest Rates
-Consumer Confidence
-Wealth Effects
-Taxes
-Unemployment

(edit)

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6
Q

Investment (15%)
Gross vs Net

A

Gross- all investment spending

Net- only investment that increases production capacity

Eg. 3 old trucks replace with 5 new
G= 5, N= 2

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7
Q

Determinants of Investment

A

-Risk
-Government Incentives + Regulation
-Interest + Credit availibility
-Technical Advances/ Progress
-Business Confidence

(edit)

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8
Q

Government Spending

Budgets

A

Budget Deficit- spending greater than revenue (injection)

Budget Surplus- spending is less than revenue (withdrawal)

Try to balance budget in the long run to ensure it doesnt harm economic growth (surplus) or create a large national debt (Deficit)

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9
Q

Determinants of Imports + Exports

A

-Exchnge Rate
-World Economy
-Protectionism (quotas, regulation)
-Non-Price factors

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10
Q

AD Analysis- movement along, down

Price Rise

A

Y axis- represents average level of prices in the economy (CPI)

Downward Slope- lower the price level the more output demanded as consumers hold more purchasing power

Rise in price = output fall:
-Domestic consumption reduced
-Demand for exports reduce, domestic goods therefore less competitive
-Demand for imports increase as cheaper in comparison

OPPOSITE FACTORS FOR OUTPUT INCREASE OFC

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11
Q

AD Analysis- shift right

A

Shift:
-Rise in consumption
-Investment
-Gov Spending
-Net Exports

Leads to- rise in demand for labour due to it being derived from demand of additional output needed to be produced

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12
Q

AD Analysis- shift left

A

X axis- Real GDP

Shift:
-Rise in interest Rates
-Strong Currency (more m than x)
-Tax

Leads to- fall in demand for labour due to it being derived demand from lost output at lower prices

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13
Q

Multiplier Effect and AD

A

-Injection shifts AD curve to the right
-Multiplier effect states money goes round in the circular flow of income before it’s all leaked out

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14
Q

Average Propensity to Consume or Save

A

Proportion of national income thats spent or saved

APC= C/Y
APS=S/Y

Y=Income

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15
Q

Marginal Propensity to Consume

A

MPC- proportion of ‘extra’ income thats spent on consumption
=/\C / /\Y

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16
Q

Multiplier from MPC- Formula

A

Mlt= 1/ 1-MPC

17
Q

Marginal Propensity to Withdraw- Formula

A

MPW= MPS + MPT + MPM (because they are all leakages)

S- Save
T- Tax
M- Import

18
Q

Calculating multiplier from MPW

A

Mlt= 1/MPW