Circular Flow Of Income

Question 1

Income flows

Answer 1

Between firms and households

Question 2

Formula of circular flow of income

Answer 2

National output = national income = national expenditure

Question 3

There are injections and…

Answer 3

…withdrawals from the flow of income

Question 4

Injections

Answer 4

Export, investment and government spending

Question 5

Withdrawals

Answer 5

Imports, savings, taxes

Question 6

What effect do injections have on the circular flow

Answer 6

A multiplier effect

Question 7

Wealth is

Answer 7

Different to income

Question 8

Equation for MPC

Answer 8

Change in C/change in Y

Question 9

Equation for MPS

Answer 9

Change in S/Change on Y

Question 10

MPW=

Answer 10

MPS+MPT+MPM

Question 11

MPC+MPW=

Answer 11

1

Question 12

Factors that determine the marginal propensity to consume?

Answer 12

Income levels
Interest rates
Consumer confidence

Question 13

Propensity is…

Answer 13

…the tendency to behave in a particular way

Question 14

High levels of income are…

Answer 14

…unlikely to spend any marginal income

E.g. £100 given to a millionaire unlikely to spend, but homeless person would spend all

Question 15

The accelerator effect

Answer 15

An increase in national income results in a proportionately larger rise in investment

Question 16

The accelerator effect examines the effect on levels of…

Answer 16

…investment from a change in economic output. Function of output known as induced investment

Question 17

An injection causes the multiplier effect to help C….

Answer 17

…this effect is then “accelerated” by increased I. If national income is growing at an increasing rate then net investment will also grow, but even more rapidly (providing business confidence) leading to a rise in real GDP

Question 18

What may cause large fluctuations in the trade cycle when interacted with each other?

Answer 18

Multiplier and accelerator

Question 19

When may firms not need to invest, but what could encourage this?

Answer 19

1) When firms have spare capacity, no need for I to increase to meet the increased AD
2) May be encouraged by government subsidies