2.4 national income

Question 1

what is an injection?

Answer 1

something that enters the circular flow of income - in the form of investment, govt. spending and exports

Question 2

what is a leakage/withdrawal?

Answer 2

anything that leaves the circular flow of income - in the form of saving, taxes and imports

Question 3

what are some examples of withdrawals?

Answer 3

• SAVINGS - money not used to finance consumption
• IMPORTS - money sent abroad for foreign goods
• TAXES - any money that is collected by the government

Question 4

what are some examples of injections?

Answer 4

• INVESTMENT - invested in firms
• EXPORTS - money from goods sold abroad
• GOVT. SPENDING - welfare benefits, spending on infrastructure

Question 5

How does the circular flow of income work?

Answer 5

• Firms and households interact and exchange resources in an economy
• Households supply firms with the factors of production and in return they receive wages, rent, dividends and profit
• Firms also give households goods and services, for which consumers pay for
• The spending and income circulates around the economy -> therefore, national income = national expenditure = national expenditure

Question 6

What happens to any income that is saved?

Answer 6

• Any income saved removes it from the circular flow -> known as a withdrawal of income
• While an investment into the economy is called an injection

Question 7

When is the economy seen to be in a state of equilibrium?

Answer 7

• When the rate of withdrawals = rate of injections
• Equivalent to when AD = AS

Question 8

What is income?

Answer 8

a flow of money that goes to the factors of production E.g. wages, welfare payments, profits, rent and interest etc.

Question 9

What is wealth?

Answer 9

a stock of assets e.g. such as savings, shares, property, pension etc.

Question 10

What is the multiplier ratio?

Answer 10

• the ratio of the rise in national income to the initial rise of AD
• The number of times a rise in the national income is larger than the rise in the initial injection of AD, which led to the rise in national income

Question 11

What is the multiplier effect?

Answer 11

Occurs when there is new demand in the economy:
- leads to an injection of more income in an economy, which leads to economic growth
- Leads to more jobs created, higher average incomes, more spending and then eventually meow income
Essentially, refers to how an initial increase in AD leads to an even bigger increase in national income

Question 12

How does MPC affect the multiplier?

Answer 12

• the higher the MPC, the bigger the size of the multiplier -> if consumers have more disposable income due tot lower income tax rates then their PC may increase
• if the MPS is higher then, the size of multiplier is smaller because they will save more than they spend

Question 13

How do you calculate the multiplier?

Answer 13

1/ 1 - MPC

Question 14

What is the significance of the multiplier to AD?