Theme 2: National Income Flashcards

1
Q

What do households supply firms with?

A

The factors of production in return for wages, rent dividends and profit.

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2
Q

National income equals…?

A

national output and national expenditure

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3
Q

What are the 3 examples of withdrawals from the economy?

A
  • savings
  • taxes
  • imports
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4
Q

What are the 3 examples of injections into the economy?

A
  • Investment
  • government spending
  • exports
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5
Q

When is the economy in equilibrium?

A

When the rate of withdrawals = the rate of injections

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6
Q

Income

A

The flow of money that goes to the factors of production.

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7
Q

Wealth

A

Stock of assets.

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8
Q

What is the impact of a net increase in injections on the circular flow of income?

A

Expansion of national output

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9
Q

What is the impact of a net increase in withdrawals on the circular flow of income?

A

Contraction of production, so output decreases

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10
Q

Multiplier ratio

A

Ratio of the rise of national income to the initial rise in AD.

(The number of times a rise in national income is larger than the rise in the initial injection of AD.)

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11
Q

The multiplier process

A

How an initial increase in AD leads to an even bigger increase in national income.

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12
Q

How can the government impact the MPC?

A

By changing the rate of direct tax. As if consumer have more disposable income due to lower income tax rates their propensity to consume might increase.

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13
Q

What is the impact of Marginal Propensity to Save (MPS) on the multiplier?

A

the increase in household savings when disposable income rises by £1

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14
Q

What is the impact of Marginal propensity to tax on the multiplier?

A

The proportion of each pound taxes by the government. The higher the rate of tax, the less disposable income each consumer has and the smaller the size of the multiplier.

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15
Q

What is the impact of Marginal propensity to import on the multiplier?

A

If consumers spend income on imports rather than domestic goods and services, income is withdrawn from the circular flow of income. This reduces the size of the multiplier.

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16
Q

What is the equation for the multiplier?

A

1/(1-MPC) or 1/MPS

17
Q

What is the reverse multiplier?

A

When a withdrawal of income from the circular flow of income could lead to an even larger decrease in income for the economy.

18
Q

What is the impact of Marginal Propensity to Consume on the multiplier?

A

the increase in consumer spending when disposable income rises by £1