9.1 The circular flow of income

Question 1

Economic growth

Answer 1

in the short run an increase in a country’s output and in the long run an increase in a country’s productive potential

Question 2

Output gap

Answer 2

a gap between actual and potential output

Question 3

National income

Answer 3

the total income for an economy

Question 4

Gross national income (GNI)

Answer 4

the total output produced by a country’s citizens wherever they produce it

Question 5

Money GDP

Answer 5

total output measured in current prices

Question 6

Real GDP

Answer 6

total output measured in constant prices

Question 7

Shadow economy

Answer 7

the output of goods and services not included in official national income figures

Question 8

Multiplier

Answer 8

a numerical estimate of a change in spending in relation to the final change in spending

Question 9

Open economy

Answer 9

an economy that is involved in trade with other economies

Question 10

Closed economy

Answer 10

an economy that does not trade with other economies

Question 11

Circular flow of income

Answer 11

a simple model of the process by which income flows around the economy

Question 12

Marginal rate of taxation

Answer 12

the proportion of extra income taken in tax

Question 13

Marginal propensity to import

Answer 13

the proportion of extra income spent on imports

Question 14

Marginal propensity to save

Answer 14

the proportion of extra income which is saved

Question 15

Aggregate expenditure

Answer 15

the total amount spent in the economy at different levels of income

Question 16

Average propensity to consume

Answer 16

the proportion of income that is consumed

Question 17

Dissaving

Answer 17

spending financed from past saving or from borrowing

Question 18

Saving

Answer 18

income minus consumption

Question 19

Marginal propensity to consume

Answer 19

the proportion of extra income that is spent

Question 20

Consumption

Answer 20

spending by households on goods and services

Question 21

Disposable income

Answer 21

income minus direct taxes plus state benefits

Question 22

Consumption function

Answer 22

the relationship between income and consumption

Question 23

Saving function

Answer 23

the relationship between income and saving

Question 24

Average propensity to save

Answer 24

the proportion of income that is saved

Question 25

Investment

Answer 25

spending by firms on capital goods

Question 26

Government spending

Answer 26

the total of local and national government expenditure

Question 27

Net exports

Answer 27

exports minus imports

Question 28

Injections

Answer 28

additions to the circular flow of income

Question 29

Withdrawals

Answer 29

leakages from the circular flow of income

Question 30

Paradox of thrift

Answer 30

where the fact of people saving more results in a fall in saving due to lower spending and income

Question 31

Inflationary gap

Answer 31

the excess of aggregate expenditure over potential output (equivalent to a positive output gap)

Question 32

Deflationary gap

Answer 32

a shortage of aggregate expenditure so that potential output is not reached (equivalent to a negative output gap)

Question 33

Autonomous investment

Answer 33

investment that is made independent of income

Question 34

Induced investment

Answer 34

investment that is made in response to changes in income

Question 35

Accelerator theory

Answer 35

a model that suggests investment depends on the rate of change in income