2.4 + 2.5 (national income + economic growth)

Question 1

What is national income

Answer 1

the value of the output of an economy over a period of time: either using the income approach or expenditure approach.

Question 2

income approach to calculating national income

Answer 2

Adding income from factors of production
- Rent, wages, interest, profit

Question 3

expenditure approach to calculating national income

Answer 3

total output of an economy by adding all expenditure (C+I+G+X-M)

Question 4

Income vs Wealth

Answer 4

Income = flow in the economy (wages, salaries, interest)

Wealth = stock of assets that can be used to generate income
(property, savings, stocks and valuables)

Question 5

Examples of withdrawals from circular flow of income

Answer 5

• Savings by households
• Taxation
• Imports

Question 6

Examples of Injections into circular flow of economy

Answer 6

• Gov spending
• investment
• exports

Question 7

what is equilibrium real national output?

Answer 7

occurs when AD = AS: economy is in balance with no inherent pressure for the price level or output to change

Question 8

Explain the short run equilibrium

Answer 8

AD = SRAS
“the economy might not be at full employment, but supply and demand are balanced at current prices”

Question 9

Explain the Long Run Equilibrium

Answer 9

AD = LRAS
“the economy operates at full employment, and output is at its potential level”

Question 10

Multiplier ratio

Answer 10

ratio of change in real income to the injection that created the change.

Question 11

what affects the size of a multiplier

Answer 11

the size of withdrawals (savings, taxes, imports) that occur during process

Question 12

What ways can you calculate the multiplier

Answer 12

1. Focusing on the MPC
   multiplier = 1/(1-MPC)
2. Focusing on the withdrawals (same formula but MPC replaced with sum of MPS, MPT, MPM)

Question 13

Significance of Multiplier for shifts in AD

Answer 13

• Amplification of AD shifts (higher multiplier means any initial increase in AD will result in larger increase in National Income)
• in times of recession the multiplier is stronger making fiscal policy more effective

Question 14

Why is the multiplier stronger during a recession

Answer 14

• Abundant spare capacity (any increase in demand can be met without triggering inflation)
• Higher MPC as individuals trying to maintain standards of living
• Limited Crowding out (interest rates low)

Question 15

Evaluation for multiplier

Answer 15

TIME LAGS

Question 16

Actual economic growth

Answer 16

Occurs when there is an increase in the real value of goods and services produced in an economy over a given period of time

Question 17

high percentage of annual AD and GDP for developing countries

Answer 17

Export-led growth
e.g China from 1988 to 2008

Question 18

Uk gov environmental aim

Answer 18

reduce emissions by 78% by 2035