National Income

Question 1

The circular flow of income

Answer 1

Simple model of the economy that shows how money, goods and factors of production move between two sectors: households and firms (economic agents)

Question 2

Income and Wealth

Answer 2

Income: flow i.e. the money they receive e.g. money from work, interest
from savings
Wealth: stock of assets i.e. the things people own e.g.
houses, possessions
- countries with high levels of wealth tend to have high levels of income and
vice versa but there is not a perfect correlation between wealth and income

Question 3

Injections into the circular flow of income

Answer 3

1) Government spending G
2) Exports X
3) Investment I

Question 4

Leakages into the circular flow of income

Answer 4

1) Tax T
2) Imports M
3) Savings S

Question 5

Imbalance of injections and leakages and equilibrium

Answer 5

• If the sum of injections is greater than the sum of leakages, then the economy will be growing
• If injections are smaller than withdrawals, it will be
  shrinking
  ● In an equilibrium, injections must be equal to leakages so the national income remains the same.

Question 6

Equilibrium real national output

Answer 6

The equilibrium position of national output is where the AD and AS curves intersect

Question 7

The multiplier ratio

Answer 7

Ratio is of the final change in income to the initial change in injection, and
the figure multiplied by the original injection to find the final change in income

Question 8

The multiplier process

Answer 8

Process: idea that an increase in AD because of an increased injection (exports, government spending or investment) can lead to a further
increase in national income

Question 9

Effects of the multiplier on the economy

Answer 9

• growth can occur quicker as any injections lead to
  bigger increase in national income, injections can be targeted at those with the
  biggest MPC to increase the size of the multiplier
  e.g. if the gov is trying to stimulate the economy they will want to give more money to people with the highest MPC i.e. those on low incomes. Govs use changes in spending to influence macroeconomic performance, but its impossible for them to know the exact effect of their spending as its difficult to know the size of the multiplier
• there will also be a time lag between the increase in income and the full effect of that increase as not everyone will spend the money straight away
  ● The overall effect on the economy will depend on the change in AD and the elasticity of the AS curve

Question 10

The Marginal Propensity to Consume (MPC)

Answer 10

The increase in consumption following an
increase in income

Question 11

The Marginal Propensity to Save (MPS)

Answer 11

The increase in savings following an increase in
income

Question 12

The Marginal Propensity to Tax (MPT)

Answer 12

The increase in taxation following an increase in income

Question 13

The Marginal Propensity to Import (MPM)

Answer 13

The increase in imports following an increase in
income

Question 14

The Marginal Propensity to Withdraw (MPW)

Answer 14

The increase in leakages following an increase
in income MPW=MPS+MPT+MPM

Question 15

MPC + MPW

Answer 15

= 1

Question 16

1 - MPC

Answer 16

= MPW

Question 17

Calculating the multiplier

Answer 17

1 / (1-MPC) or 1 / MPW

Question 18

Factors that change the MPC and MPW

Answer 18

• interest rates
• household wealth
• exchange rates
• quality and availability of imports
• rate of direct and indirect taxes
• performance of the economy (stage of economic cycle)

Question 19

Effects on the economy of the multiplier

Question 20

Significance of the multiplier effect for shifts in AD