2.4 and 2.5 National Income and Economic Growth

Question 1

Income

Answer 1

A flow of money earned by people e.g. wages, salaries

Question 2

Wealth

Answer 2

Assets owned by someone e.g. savings, properties

Question 3

Benefits of Inequality

Answer 3

Incentive effect: If you get paid more for working hard, you will do
Entrepreneurs require rewards: Need a reason to start a business- which is wealth
Trickle down effect: Those who earn lots will spend it, giving to those lower down
Fairness: Not fair to take all the earned money off them

Question 4

Problems of Inequality

Answer 4

Inequalities shifts growth: poor people don’t get as much so won’t continue causing less growth
Inequalities decrease education: Poorer can’t get good enough education
Decreases health: If you don’t get enough good food for a healthy lifestyle

Question 5

Reasons why inequality has changed

Answer 5

Changes in the highest rate of income tax
Increased globalisation leading to a fall in wages of low skilled workers
Increase of multinational companies that minimise their taxes through the use of tax havens
In recent years low interest rates and quantitive easing has resulted in high asset prices for houses and shares

Question 6

How to reduce inequality

Answer 6

Increase progressive taxes: Take more from high earners and less from the poor
National Minimum wage: Gov. can increase national min wage
Universal Basic Income: Give all weekly living standard
Reduce unemployment

Question 7

Equilibrium Means…

Answer 7

Macroeconomic equilibrium occurs when the quantity of real GDP demanded and real GDP supplied is equal. Supplied at the point of intersection of AD

Question 8

Output Gap

Answer 8

Difference between actual level of GDP and its estimated potential level. It’s usually expressed as a percentage of the level of potential output.

Question 9

Negative Gap

Answer 9

When the level of GDP is less than potential
Main Problem is likely to be higher unemployment and possible deflation rise

Question 10

Positive Gap

Answer 10

Actual GDP is greater than the estimated potential GDP
Some resources are being used beyond usual capacity
Main problem is rising demand pull and cost push
Inflationary pressures

Question 11

What is the Multiplier?

Answer 11

An increase in private or government spending in an economy will lead to a larger overall increase in GDP than the initial change in spending.
The size of the multipliers effect depends on how quickly income leaks from the circular flow.

Question 12

Why does the multiplier effect occur?

Answer 12

1. Because injections of the new demand for goods and services into the circular flow of income, stimulates further rounds of spending.
2. This leads to bigger final effect on national output and employment.

Question 13

Positive Multiplier

Answer 13

When an initial increase in an injection (or a decrease in a leakages) leads to a greater final increase in real GDP

Question 14

Negative Multiplier

Answer 14

When an initial decrease in an injection (or a decrease in a leakage) leads to greater final decrease in real GDP

Question 15

Formula for the Multiplier

Answer 15

1/ 1- Marginal propensity to leak from the circular flow

Question 16

Marginal Propensity to consume means…

Answer 16

What proportion of extra income is spent by consumers

Question 17

Marginal Propensity to save means…

Answer 17

What proportion of extra income is saved

Question 18

Marginal Propensity to import means…

Answer 18

How much of your extra income is spent on imports

Question 19

Marginal Propensity to tax means…

Answer 19

Extra tax paid on additional income

Question 20

Multiplier is high when:

Answer 20

Economy has plenty of spare capacity
Marginal propensity to import and tax is low
High propensity to consume is extra income

Question 21

Multiplier is low when:

Answer 21

Economy is close to its capacity limits
Propensity to import goods

Question 22

Accelerator Effect

Answer 22

More investment
There is often a surge in capital spending by business when an economy is growing quite strongly. This is called the accelerator affect.

Question 23

Boom

Answer 23

Economy grows rapidly
Constant growth, year on year
When real national output is rising at a faster rate than the trend
Leads to a positive national output gap

Question 24

Slowdown

Answer 24

Occurs when the rate of growth decelerates
But output is still rising

Question 25

Recession

Answer 25

A fall in the level of national output i.e. a period when growth is negative and there is a negative output gap

Question 26

Recovery

Answer 26

When real GDP picks up from the trough reached at the low point of the recession and the national output gap shrinks

Question 27

What causes the trade cycle: Momentum Effect

Answer 27

Positive economic growth leads to increased consumption, investment, asset prices and even more growth (Goes both ways)

Question 28

What causes the trade cycle: Interest Rate Changes

Answer 28

Higher interest rates can lead to an economic downturn

Question 29

What causes the trade cycle: Technology

Answer 29

Improvements in technology can lead to a boom

Question 30

What causes the trade cycle: Potential Business Cycle

Answer 30

Policies are implemented to create a boom before election

Question 31

Benefits of Improvements in productivity

Answer 31

Higher GDP per worker
Lower unit costs
Higher Wages
Higher Profit

Question 32

Benefits of New Goods and Services

Answer 32

Lower real wages
Consumer welfare gain
Improved living standards

Question 33

Benefits of Improved Health

Answer 33

Healthy life expectancy
Labour force expands
Increased productivity

Question 34

Problems of Economic Growth

Answer 34

Higher inflation and Interest rates increasing to combat them
Environmental effects, as there would be more pollution and waste along with the risk of unstable extraction of finite resources
Inequalities of income and wealth, much of the growth may be just for the wealthier small percentage