Theme 2 - The UK economy - Performance and Policies (2.4 - National Income)

Question 1

Define National Income [1]

Ref - 2.4.1 - National Income

Answer 1

The value of the output, expenditure or income of an economy [1]

Question 2

Define the Circular Flow of Income {1]

(Macroeconomics Pack 1 - Page 2)

Answer 2

A model of the economy which shows a continuous flow of goods, services and money between households and firms [1]

Question 3

State 3 factors which can inject money into the circular flow of income [3]

(Macroeconomics Pack 1 - Page 2)

Answer 3

1. Business Investment (I)
2. Government Spending (G)
3. Exports (X)

Question 4

State 3 factors which can withdraw money from the circular flow of income [3]

(Macroeconomics Pack 1 - Page 2)

Answer 4

1. Savings (S)
2. Taxations (T)
3. Imports (M)

Question 5

Define Income [1]

(Macroeconomics Pack 1 - Page 3)

Answer 5

A flow of money acting as a reward for a service of production [1]

Question 6

Define Wealth [1]

(Macroeconomics Pack 1 - Page 3)

Answer 6

The stock of assets held by an individual/organization [1]

Question 7

What is meant by the Macroeconomic equilibrium of an economy? [1]

Ref - 2.4.3 - Macroeconomic Equilibrium

Answer 7

Where aggregate demand meets aggregate supply. [1]

Question 8

What is meant by the Multiplier Effect? [1]

Ref - 2.4.4 - The Multiplier

Answer 8

An increase in injections into a circular flow of income, will cause a great increase in income [1]

Question 9

Describe an example of the Multplier Effect in real life. [2]

Ref - 2.4.4. - The Multiplier

Answer 9

If businesses and firms increase investments, [1] this means that the income earnt from the investment greatly increases, according to the multiplier. [1]

Question 10

What are the 5 marginal propensities used to calculate the multiplier? [5]

Ref - 2.4.4. - The Multiplier

Answer 10

1. Marginal Propensity to Save (MPS) [1]
2. Marginal Propensity to Consume (MPC) [1]
3. Marginal Propensity to Tax (MPT) [1]
4. Marginal Propensity to Import (MPM) [1]
5. Marginal Propensity to Withdraw (MPW) [1]

Question 11

State the formulas used to calculate the multiplier [2]

Ref - 2.4.4. - The Multiplier

Answer 11

1
______

1-(MPC)

OR

1
_______________________
(MPS+MPT+MPM)

Question 12

Evaluate the Classical model in a Long-Run Equilibrium. [5]

Ref - 2.4.3 - Macroeconomic Equilibrium

Answer 12

Real GDP will increase when AD increases. [1]
To achieve this, businesses must pay workers overtime wages to increase output levels. [1]
This increases the costs of production for firms. [1]
This will decrease short-run aggregate supply. [1]
This will therefore cause a return to the original Real GDP, and an increase in price level. [1]

Question 13

Evaluate the Keynesian model in a Long-Run Equilibrium

Ref - 2.4.3 - Macroeconomic Equilibrium

Answer 13

An increase in AD when an economy has spare capacity will only impact Real GDP. [1]
An increase in AD when an economy has little capacity will impact the price level. [1]