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Macroeconomics > 2.4 National Income > Flashcards

2.4 National Income Flashcards

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1
Q

What is the most basic circular flow of income

A

A two sector economy with just households and sellers

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2
Q

What do households have

A

The own all the wealth and resources
They provide land, labour and capital

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3
Q

What do household use money for

A

To buy goods and services produced by firms

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4
Q

What happens to money vs G&S and FOP

A

Money flows in one direction and goods and services and FOP go the other way

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5
Q

In the simple circular flow model, what are the three ways of measuring the level of economic activity

A

National output
National expenditure
National income

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6
Q

What is national output

A

Value of flow of G&S produced by firms for households

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7
Q

What is national expenditure

A

Value of spending by households on G&S

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8
Q

What is national income

A

Income paid by firms to households in return for FOP

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9
Q

What are they 4 FOP

A

Land
Labour
Capital
Entrepreneurship

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10
Q

What is = in the simple circular flow

A

National output = national expenditure = national income

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11
Q

What is the problem with the 2 sector model of the economy

A

It is too simplified

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12
Q

What is the first component of the circular flow that needs to be added

A

Government

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13
Q

How does government affect the circular flow

A

Taxation (T) taking away
Spending (G) adding

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14
Q

How can government increase the flow of income

A

Spending more than it takes away

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15
Q

What is the second addition to the circular flow

A

Financial services

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16
Q

How do financial services affect the circular flow

A

Investment (I) injecting
Saving (S) taking money out

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17
Q

Who can save in the economy (S)

A

Consumers or producers

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18
Q

What is the last addition to the circular flow of income

A

Foreign markets

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19
Q

How do foreign markets affect the circular flow

A

Exports (X) adding to the flow
Imports (M) taking away from the flow

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20
Q

What is wealth

A

A stock of assets
What people own like houses and possessions

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21
Q

What is income

A

A flow of assets
Money received form work, interest from savings etc

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22
Q

What can be said about countries with high levels of wealth

A

They are likely to have high income levels but there is NOT perfect correlation between the two

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23
Q

What are the 3 injections

A

G (gov spending)
I (investment)
X (exports)

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24
Q

What is an injection in the economy

A

Monetary additions to the economy

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25
What is a withdrawal/leakage from the economy
Where money is removed from the economy
26
What are the withdrawals/leakages from the economy
T (taxes) S (savings) M (imports)
27
What happens if: Σ injections > Σ withdrawals/leakages
Economy is growing
28
What happens if: Σ injections < Σ withdrawals/leakages
Economy is shrinking
29
What happens if: Σ injections = Σ withdrawals/leakages
Equilibrium so national income remains constant
30
What is the equilibrium position of national output
Where AD and AS curves intersect
31
What does a shift in AD or AS mean?
Equilibrium will change
32
What affects the level of change in equilibrium?
The size of the AD/AS shift and elasticities fo the urge which hasn’t moved
33
What do classical and Keynesian economists agree upon
AD is downwards sloping and AS is upwards sloping
34
What is the classical LRAS curve
Perfectly inelastic (vertical)
35
What does LRAS being perfectly inelastic mean
A shift of AD would not affect long run national output (only price levels)
36
What do classical economists believe hte economy will return to eventually
Full employment level so 0 unemployment in the long run
37
What do classicists conclude about increases in AD
increased AD will increase price and output in short-term but over time, prices will continue to rise as the economy moves back to long-term equilibrium
38
What do classicists believe is the only way to increase output long-term
To increase LRAS (changes in AD without a change in LRAS are only inflationary)
39
What does a rise in LRAS cause
Lower prices and higher output (right shift in the vertical line)
40
What does the impact of a shift on AD on a Keynesian curve depend on?
The elasticity of the curve (if the economy is at or near full employment)
41
What does a rise in LRAS do when near full employment?
Increases output Decreases price level
42
What does a rise in LRAS do when NOT near full employment?
No effect on prices our output
43
What is a rise in LRAS
A shift of the LRAS curve
44
Difference between micro and macro economics with S&D
In micro, S factors do not affect D and vice versa In macro, AD factors also affect AS and vice versa
45
Example of in macro where AD factors affect AS
Investment is a component of AD but also LRAS would increase as firms can produce more.
46
What does the fact that AS factors affecting AD in macro mean
LR disequilibrium caused by AD shift may be brought back to equilibrium by an increase in LRAS instead of a fall in AD
47
What does the fact that AS factors affecting AD in macro not necessarily mean
Not all investments lead to increased production (Firms may go out of business) So LRAS does not increase
48
What does the extent to which investment increases output and lessens inflation depend upon?
Rate of return
49
What is the multiplier process
The idea htat an increase in AD because of increased injection can lead to a further increase in national income
50
What is the ratio of the multiplier process
The ratio of the final change in income to the initial change in injection
51
What does the initial injection represent
An increase in spending and increases income for someone else who then spends it (consumption)
52
Example of multiplier process
Gov spends £100 million on new jobs Those who earn the money spend an extra £90 million Of that money, £81 million is then spent Therefore there is a 90% multiplier
53
What is MPC
Marginal propensity to consume
54
How is the multiplier able to work
The concept of circular flow (one person’s spending is another’s income)
55
What have teh IMF calculate the multiplier to be in developed countries
In the LR, it is about 1.5
56
What have the IMF calculated the multiplier to be in Developing countries
1.6 in the LR
57
What is the -ve multiplier effect
Where withdrawal form the do.cnomy could lead to an even further fall in income, decreasing economic growth and potential economic decline
58
What will government plans to cut deficits lead to with a -ve multiplier effect
An even further decrease of the economy
59
Where can injections be targeted to increase the multiplier
Those with the biggest MPC
60
If the government is trying to stimulate the economy, who will they likely target
Those on low incomes as they have a high MPC
61
Why is it impossible for the government to know the exact effect of their spending
It is difficult to know the exact size of the multiplier
62
What is another problem with information surrounding the multiplier effect
There is a time lag between income increase and full effect of the increase as not everyone will spend the money straight away
63
What does the overall effect on the economy depend upon from the multiplier
The change in AD AS curve elasticity
64
What is the MPC
Increase in consumption following an increase in income
65
What is the MPS
Increase in savings following an increase in income
66
What is MPT
Increase in taxation following an increase in income
67
What is MPM
Increase in imports following an increase in income
68
What is MPW
Increase in leakages following an increase in income
69
How do you calculate MPW
MPW=MPS+MPT+MPM
70
How do you calculate the multiplier
1 / MPW OR 1 / (1-MPC)
71
What does a multiplier lead to
An increase in AD higher than the original increase
72
What must a multiplier have to have its desired effect
There must be sufficient spare capacity in the economy for extra output to occur (must be within PPF)
73
What happens if AS is perfectly inelastic in terms of the Multiplier effect
The only impact of a multiplier will be an increase in price levels
74
What happens if AS is elastic in terms of the Multiplier effect
The more elastic, the smaller hte effect on price but bigger effect on output
75
What does the effect of a multiplier depend upon (similar to AD)
Shape of AS curve and if it is LR or SR
76
In general, what can be said about hte multiplier
Big effect with spare economic capacity and low MPW Small effect when there is little spare capacity (only inflation caused)

Macroeconomics (7 decks)

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