2.4 National Income Flashcards
(29 cards)
What is the circular flow of income?
The interaction and exchange of resources between firms and households in an economy.
What do households supply to firms in the circular flow of income?
Factors of production such as labour, land, capital, and enterprise.
What do firms provide to households?
Goods and services.
What do households receive in return for supplying factors of production?
Wages, rent, dividends, and profit.
What is the relationship between national income, national output, and national expenditure?
National income = national output = national expenditure.
What effect does saving income have on the circular flow?
It removes income from the circular flow, acting as a withdrawal.
What is an injection in the context of the circular flow of income?
Money that enters the economy, such as investments and government spending.
What are examples of withdrawals from the circular flow of income?
Taxes, saving, and imports.
What is the distinction between income and wealth?
Income is a flow of money; wealth is a stock of assets.
What happens to national output when there are net injections into the economy?
There will be an expansion of national output.
What occurs when there are net withdrawals from the economy?
There will be a contraction of production, and output decreases.
What occurs at a price above equilibrium?
There will be excess supply.
What occurs at a price below equilibrium?
There will be excess aggregate demand.
What happens if the economy becomes more productive?
Supply shifts to the right, lowering the average price level and increasing national output.
What is the multiplier ratio?
The ratio of the rise in national income to the initial rise in AD.
What does the multiplier effect refer to?
How an initial increase in AD leads to a larger increase in national income.
What is the marginal propensity to consume (MPC)?
The proportion of each additional pound of household income that is spent.
How does a higher MPC affect the multiplier size?
The size of the multiplier increases.
What is the marginal propensity to save (MPS)?
The proportion of each additional pound of income that is saved.
What is the relationship between MPS and MPC?
MPS + MPC = 1.
What is the marginal propensity to tax (MPT)?
The proportion of each pound taxed by the government.
What effect does a higher MPT have on the multiplier?
It reduces the size of the multiplier.
What is the marginal propensity to import (MPM)?
The proportion of income spent on imports.
What happens if consumers spend income on imports?
Income is withdrawn from the circular flow of income.
