Y1 assessment- circular flow of income

Question 1

Flows

Answer 1

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

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

Question 2

Injections + Withdrawals

Answer 2

-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)

Question 3

Multiplier Effect

Answer 3

-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

Question 4

Components of AD

Answer 4

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

Question 5

Determinants of Consumption and Saving (65%)

Answer 5

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

(edit)

Question 6

Investment (15%)
Gross vs Net

Answer 6

Gross- all investment spending

Net- only investment that increases production capacity

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

Question 7

Determinants of Investment

Answer 7

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

(edit)

Question 8

Government Spending

Budgets

Answer 8

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)

Question 9

Determinants of Imports + Exports

Answer 9

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

Question 10

AD Analysis- movement along, down

Price Rise

Answer 10

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

Question 11

AD Analysis- shift right

Answer 11

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

Question 12

AD Analysis- shift left

Answer 12

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

Question 13

Multiplier Effect and AD

Answer 13

-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

Question 14

Average Propensity to Consume or Save

Answer 14

Proportion of national income thats spent or saved

APC= C/Y
APS=S/Y

Y=Income

Question 15

Marginal Propensity to Consume

Answer 15

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

Question 16

Multiplier from MPC- Formula

Answer 16

Mlt= 1/ 1-MPC

Question 17

Marginal Propensity to Withdraw- Formula

Answer 17

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

S- Save
T- Tax
M- Import

Question 18

Calculating multiplier from MPW

Answer 18

Mlt= 1/MPW