2.4 National income

Question 1

injections into the circular flow

Answer 1

-Government spending
-Exports
-Investment

Question 2

Withdrawls from the circular flow

Answer 2

-Imports
-Taxes
-Savings

Question 3

Income vs wealth

Answer 3

Wealth is the things people own e.g. houses, possessions whilst income is the money they receive e.g. money from work, interest from savings.

Question 4

What are Injections?

Answer 4

monetary additions to the economy

Question 5

What are withdrawls?

Answer 5

where money is removed from the economy

Question 6

What happens when injections are greater than withdrawls?

Answer 6

Economic growth

Question 7

In equlibrium what must happen

Answer 7

Injections must be equal to withdrawals and so the national income remains the same.

Question 8

the multiplier

Answer 8

an initial increases in aggregate demand leads to a far bigger increase in output

Question 9

ratio on the multiplier

Answer 9

the final change in income to the initial change in injection

Question 10

effects of the multiplier on the economy

Answer 10

-The multiplier means that growth can occur quicker, as any injections lead to a bigger increase in national income. Injections can be targeted at those with the biggest MPC in order to increase the size of the multiplier.
-Governments use changes in spending to influence macroeconomic performance, but it is impossible for the government to know the exact effect of their spending as it is difficult to know the size of the multiplier.
-As with many things in macroeconomics, 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 11

Effect of the multiplier on marginal propensity to consume

Answer 11

The increase in consumption following an increase in income

Question 12

Effect of the multiplier on marginal propensity to save

Answer 12

The bigger the MPS the smaller the multiplier

Question 13

Effect of the multiplier on marginal propensity to tax

Answer 13

The increase in taxation following an increase in income

Question 14

Effect of the multiplier on marginal propensity to withdraw

Answer 14

The increase in leakages following an increase
in income

Question 15

Effect of the multiplier on marginal propensity to import

Answer 15

The increase in imports following an increase in
income

Question 16

Marginal propensity to withdraw equation

Answer 16

MPS+MPT+MPM

Question 17

Multiplier equation

Answer 17

1 1
———– = ————
1- MPC MPW

Question 18

the multiplier effects on AD

Answer 18

-The multiplier leads to an increase in AD higher than the original increase but for it to have the desired effect, there must be sufficient spare capacity in the economy (i.e.
it cannot be at full output) for extra output to be produced.
-If the AS is perfectly inelastic, like on the classical LRAS curve, then the only impact of the multiplier will be to increase price; it will not affect output in the long run,
although it will in the short run. The more elastic the curve, the smaller the effect on price but the bigger the effect on output.
-Therefore, as with any increase in AD, the effect of the multiplier depends on the
shape of the AS curve and whether it is short run or long run. The size of the
increase in AD will depend on both the size of the initial increase in AD and the size
of the multiplier.