National Income

Question 1

Injections to the circular flow of income

Answer 1

Government spending, investment, exports

Question 2

Withdrawals from the circular flow of income

Answer 2

Taxes, savings, imports

Question 3

Classic LRAS and AD

Answer 3

As LRAS is perfectly inelastic, a shift in AD will increase price/output in the short-run but in the long-run output won’t change only inflation

Question 4

Keynesian LRAS and AD

Answer 4

Impact of a shift in AD depends on elasticity of curve - during a recession output low so government should try increase AD

Question 5

Investment effect

Answer 5

Investment increases AD, but also increases LRAS as firms use machinery to increase production

Question 6

Multiplier

Answer 6

An initial injection into the economy leading to a further increase in income/growth

Question 7

What is the correlation between MPC and the multiplier?

Answer 7

Greater the MPC, greater the size of the multiplier

Question 8

What is the issue with the multiplier?

Answer 8

Can also have a negative multiplier

Question 9

Multiplier effect on economy

Answer 9

Quicker growth, can also target those on lower incomes to boost MPC - but has a time lag

Question 10

MPM

Answer 10

Marginal propensity to import

Question 11

What is the circular flow argument,?

Answer 11

One person’s consumption is another’s income

Question 12

What is a rise in income’s effect on all marginal propensities?

Answer 12

All increase, but lower income rise will increase MPC more and higher income rise will increase MPS more

Question 13

What is MPW?

Answer 13

Marginal propensity to withdraw ( MPW = MPS+MPT+MPM)

Question 14

Multiplier calculation

Answer 14

1 divided by 1- MPC or 1 divided by MPW

Question 15

What are the conditions for a multiplier to work?

Answer 15

Multiplier only works if there is sufficient spare capacity - if not just causes inflation - greater spare capacity , more elastic so less price change and more output change