Chains of Reasoning Flashcards
(29 cards)
Why is national income used?
National income is the total value of all goods and services produced in an economy over a period. Because it measures economic activity, it indicates how well an economy is performing, leading to better policy decisions. Therefore, it’s a key macroeconomic indicator.
How does the circular flow of income work?
The circular flow of income shows how money moves between households and firms. Because households provide factors of production and receive income, and firms sell goods and receive consumption spending, income circulates. Therefore, an injection or withdrawal affects total income in the economy.
What are injections and how do they help growth?
Injections are additions to the economy such as investment, government spending, and exports. Because they increase overall demand, they lead to higher income and output. Therefore, injections cause economic growth.
What are withdrawals and how do they help growth?
Withdrawals are leakages from the economy such as saving, taxation, and imports. Because these reduce spending on domestic goods and services, they decrease income. Therefore, excessive withdrawals can slow economic growth.
What is the multiplier effect and how does it cause growth?
The multiplier effect is when an initial injection leads to a greater final increase in national income. Because the injection is re-spent multiple times, it multiplies in impact. Therefore, small changes in investment or spending can cause larger economic changes.
How does saving affect the multiplier?
More saving reduces the size of the multiplier. Because less of each income round is spent, the ripple effect weakens. Therefore, economies with high saving rates may experience less benefit from injections.
How does taxation affect the multiplier?
Higher taxation reduces disposable income. Because people spend less, the multiplier effect weakens. Therefore, fiscal policy affects how powerful the multiplier is.
How does the marginal propensity to consume (MPC) affect the multiplier?
A higher MPC means more income is spent. Because more spending occurs in each round, the multiplier is stronger. Therefore, MPC directly influences the size of the multiplier.
What is the formula for the multiplier?
Multiplier = 1 / (1 - MPC) or 1 / MPW. Because it measures how many times the initial injection is re-spent, it’s key to predicting total income change. Therefore, economists use it in fiscal planning.
What is marginal propensity to withdraw (MPW)?
MPW is the portion of additional income not spent, including saving, tax, and imports. Because this reduces spending in the circular flow, it limits the multiplier. Therefore, higher MPW means a smaller multiplier.
What happens when injections exceed withdrawals?
National income rises. Because there’s more spending entering than leaving the economy, output and income grow. Therefore, the economy experiences an expansion.
What happens when withdrawals exceed injections?
National income falls. Because more money is leaving the economy than entering, demand and output drop. Therefore, it may lead to a recession.
How does investment affect national income?
Investment is an injection. Because it increases demand and productive capacity, it raises income through the multiplier. Therefore, it’s vital for long-term growth.
How does government spending affect national income?
It’s an injection into the circular flow. Because it increases aggregate demand, it raises national income via the multiplier. Therefore, fiscal policy can stimulate growth.
How do exports affect national income?
Exports are an injection. Because they bring in income from abroad, they increase demand for domestic goods, raising national income. Therefore, trade surpluses can boost economic growth.
How do imports affect national income?
Imports are a withdrawal. Because spending leaks out of the economy, they reduce national income. Therefore, high imports can slow growth.
How does taxation affect national income?
Taxation is a withdrawal. Because it reduces disposable income, it lowers consumption and demand. Therefore, it can reduce national income.
How does saving affect national income?
Saving is a withdrawal. Because it reduces consumption, there’s less spending in the economy. Therefore, it slows the circular flow of income.
What causes a positive output gap?
When actual output exceeds potential output. Because demand is high, firms may operate above capacity. Therefore, it may lead to inflation.
What causes a negative output gap?
When actual output is below potential output. Because of low demand, resources are underused. Therefore, unemployment may rise.
How can the multiplier cause economic instability?
If the multiplier is large, small shocks can lead to big swings in income. Because of the amplified effect, booms and busts may occur. Therefore, it can make economies volatile.
Why is the circular flow model useful?
It shows the relationship between income, output, and expenditure. Because it includes injections and withdrawals, it helps explain changes in national income. Therefore, it’s a key tool in macroeconomics.
What is equilibrium in the circular flow?
Where planned injections equal planned withdrawals. Because there’s no pressure for change, income remains stable. Therefore, it’s a key concept for economic balance.
What role does consumption play in national income?
Consumption is a major component of AD. Because it drives demand, changes in consumption directly impact national income. Therefore, consumer confidence is critical.
