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Macroeconomics Main > 02 Circular Flow of Income and Macroeconomic Objectives > Flashcards

02 Circular Flow of Income and Macroeconomic Objectives Flashcards

1
Q

Define the Circular Flow of Income.

A

Shows connections between different sectors of the economy. It revolves around flows of goods and services and factors of production between firms and households.

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2
Q

What are injections?

A

Extra money placed into the circular flow of income.

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3
Q

What are withdrawals?

A

Money taken out of the circular flow of income (also known as leakages)

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4
Q

What are the 3 injections?

A
  • Investment
  • Exports
  • Government spending
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5
Q

What are the 3 withdrawals?

A
  • Taxation
  • Imports
  • Saving
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6
Q

When does macroeconomic equilibrium occur in the circular flow of income model?

A

If there is no pressure on national income to rise or to fall.

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7
Q

When does national income increase?

A

I + G + X > S + T + M: When there are more injections

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8
Q

When does national income decrease?

A

I + G + X < S + T +M: When there are more withdrawals

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9
Q

When is there macroeconomic equilibrium?

A

I + G + X = S + T + M: When injections equal withdrawals

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10
Q

What are the 3 ways to measure GDP?

A
  • Output
  • Income
  • Expenditure
  • Any of the 3 should theoretically give the same answer
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11
Q

If withdrawals are greater than injections, the economy will…

A

suffer declining incomes, output and expenditure.

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12
Q

Lower incomes will reduce the levels of…

A

taxation and saving, causing withdrawals to shrink until they equal injections.

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13
Q

If injections are greater than withdrawals, the economy will…

A

expand.

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14
Q

When the economy is growing, households and firms will pay…

A

more tax, and are also likely to save more.

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15
Q

Define income.

A

A flow of money which acts as a reward for the services of factors of production.

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16
Q

Define wealth.

A

The stock of assets held by an individual or organisation.

17
Q

Give examples of income.

A
  • Wages
  • State pension
  • Dividends
  • Interest
18
Q

Give examples of wealth.

A
  • Shares
  • Bank savings
  • Gold
  • House
19
Q

What is an example of gaining income from wealth?

A

Dividends from shares.

20
Q

What is an example of gaining wealth from income?

A

Those on high income can afford to build up their wealth over time by buying up shares.

21
Q

What is the link between income and wealth?

A

They have a positive correlation, meaning that citizens tend to either have high levels of income and wealth or low levels of income and wealth.

22
Q

What is the counter-argument to the idea that income and wealth have a positive correlation?

A
  • It depends on how much income wealth is generating
  • There may be a time lag
  • Redistribution policies could reduce inequalities in income and wealth
23
Q

Define the multiplier effect.

A

When an initial change in injections/withdrawals to the circular flow of income leads to a greater final change in real GDP/national income.

24
Q

What is the Marginal Propensity to Consume? Give an example.

A

Measures the proportion of extra income that is spent on consumption - e.g., if an individual gains an extra £10, and spends £7.50, then the MPC will be 7.5/10 = 0.75

25
Q

How can the multiplier be calculated?

A

1/(1-MPC)

26
Q

If consumers spend 80p and save 20p of every £1 of extra income, the multiplier will be…

A

1/(1-0.8) = 1/0.2 = 5

27
Q

Changes in aggregate demand may lead to a…

A

greater change in national income.

28
Q

What is a closed economy?

A

When there is no government sector or trade - consumers can spend or save.

29
Q

If the Marginal Propensity to Consume is 0.9, then the Marginal Propensity to Save is…

A

0.1

30
Q

MPC + MPS =

A

1

31
Q

What is the evaluation to the Multiplier?

A
  • Depends on withdrawals - multipliers would be reduced if consumers who benefit from them were to save their money, buy foreign imports with their money and if consumers and businesses have to spend money on T rather than S and I
  • May take time for full effect of multiplier to come into effect - e.g., time for government support to see new firms set-up
  • Hard to measure the exact effects of the multiplier which could make managing the economy more difficult
32
Q

What are the 4 main macroeconomic objectives?

A
  1. High Economic Growth
  2. Low and Stable Inflation = 2% CPI (+ or - 1%)
  3. Reduction in Unemployment
  4. A Balanced Balance of Payments (M and X)
33
Q

What other macroeconomics objectives are there, other than the main 4?

A
  • A balanced budget (G and T)
  • Make the distribution of income more equal
  • Protection of the environment
34
Q

What policy tools can be used by the government to achieve its objectives?

A
  • Fiscal Policy
  • Monetary Policy
  • Supply Side Policies

Macroeconomics Main (17 decks)

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