2.4 National Income

Question 1

What is the difference between income and wealth?

Answer 1

Wealth is a ​stock of assets whilst income is a ​flow​. 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 2

What are injections to the circular flow of income

Answer 2

● Government spending
● Investment
● Exports

Question 3

What are withdrawals/leakages to the circular flow of income?

Answer 3

● Taxes
● Savings
● Imports

Question 4

What is the multiplier process/ratio?

Answer 4

● The idea that an increase in AD because of an ​increased injection can lead to a ​further increase in national income.
● It is the ratio of ​the final change in income to the initial change in injection​; the figure multiplied by the original injection gives the final change in income.

Question 5

What is the marginal propensity to consume (MPC)?

Answer 5

The increase in consumption following an increase in income

Question 6

What is the marginal propensity to save (MPS)?

Answer 6

​The increase in savings following an increase in income

Question 7

What is the marginal propensity to tax (MPT)?

Answer 7

The increase in taxation following an increase in income

Question 8

What is the marginal propensity to import (MPM)?

Answer 8

The increase in imports following an increase in income

Question 9

What is the marginal propensity to withdraw (MPW)?

Answer 9

The increase in leakages following an increase in income ​MPW=MPS+MPT+MPM

Question 10

How is the multiplier calculated?

Answer 10

Question 11

Effects of the multiplier based on AS/AD?

Answer 11

● 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 for extra output to be produced. (i.e. it cannot be at full output)
● 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

In general, the multiplier will have a big effect when there is plenty of spare capacity in the economy and the MPW is low/MPC is higher. It has little effect on output when there is little spare capacity in the economy so the rising demand only creates rising prices.