2.4

Question 1

What is the circular flow of income and define multiplier effect

Answer 1

CFOY- households exchange factors of production eg land,labour,capital for firms to make goods/services and households receive incomes. Firms make goods and services in exchange for consumer expenditure.

The multiplier effect- an increase in AD because of an increased injection will lead to an even greater increased in national income

Eg gov spends money to create jobs= more money spent by ppl who have jobs and more spending by ppl who receive jobs

Question 2

Effect of multiplier on economy

Answer 2

Multiplier= quicker growth. Injections can be targeted at people who have highest MPC, low incomes increase the size of the multiplier

However impossible to know effect of spending and size of multiplier, time lag can also occur as ppl wont spend money straight away

High MPC= high multiplier as more is spent, less withdrawn

Question 3

What is negative multiplier effect and injections and withdrawals

Answer 3

NME- withdrawal from the economy could lead to an even further fall in national income= decreased economic growth= decline

Injections are monetary additions to the economy eg gov spending, investment and exports

Withdrawals are where money is removed from the economy eg taxes,savings, imports

Question 4

When does econ growth increases an decrease linked to injections

Answer 4

If sum of injections is greater than withdrawals= economic growth increases

If injections are less than withdrawals= decreased economic growth

In and equilibrium,injections must be equal to withdrawals and so the national income remains the same

Question 5

Effects of changes in AD/ significance of multiplier to AD

Answer 5

• Only works if there is sufficient spare capacity ie cant be at full output otherwise it can cause price rises
• In SR the more elastic the curve, the smaller the effect on price buy bigger effect on output
• Size of initial increase

Question 6

What is MPT, MPM, MPW

Answer 6

MPT- proportion of an income increased that is taken away as tax

MPM (import)- proportion of an income spent on imports

MPW(withdraw)- proportion of an income increased that is withdrawn from circular flow

Question 7

Equation for multiplier

Answer 7

Multiplier = 1/1-MPC
Multiplier= 1/MPW

MPW= MPS+MPT+MPM