Economics Chapter 6: National Income and Determination

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Questions and Answers

What is the primary role of households in the circular flow of income?

To produce goods and services.

To manage investments in firms.

To provide factor services for production. (correct)

To regulate financial markets.

Which of the following is NOT considered a factor payment to households?

Rent

Sales Revenue (correct)

Interest

Wages

According to the circular flow, what is the relationship between the total expenditure on final output and total income?

Total expenditure is always greater than total income.

Total expenditure is always less than total income.

Expenditure may be higher or lower than total income.

Total expenditure is equal to the total income. (correct)

What happens to household income that is not spent on goods and services?

It is saved and channeled into productive investments. (A) Signup and view all the answers

What is a 'real flow' in the circular flow model?

The exchange of goods and services. (A) Signup and view all the answers

What is the role of financial markets in the circular flow model?

They channel savings into investments. (D) Signup and view all the answers

Which sector is MOST associated with the production of goods and services?

Firms (C) Signup and view all the answers

What type of income is earned by households for providing capital as a factor of production?

Interest (C) Signup and view all the answers

Which of the following could lead to an increase in the working population?

An increase in the total population (A) Signup and view all the answers

Which of the following is NOT a factor that could increase the productivity of factors of production?

Implementation of obsolete and outdated technology (B) Signup and view all the answers

What is the impact of improvements in productivity on the long-term aggregate supply?

It leads to a long term rise in aggregate supply (A) Signup and view all the answers

Based on the content provided, how does the average cost of production change when productivity of factors increases?

Average cost of production decreases (C) Signup and view all the answers

Which of the following is a direct result of a rise in the productivity of factors of production?

A rise in the short-run aggregate supply and a rise in long run aggregate supply. (D) Signup and view all the answers

According to the content, what primarily constrains an economy?

The finite amount of factors of production (C) Signup and view all the answers

Which of the following models is introduced as a means to better show the constraints of resources compared to the circular flow of income?

The AD-AS model (D) Signup and view all the answers

What is the primary purpose of the aggregate demand (AD) and aggregate supply (AS) model?

To show the impact of changes in variables on the real economy (B) Signup and view all the answers

A primary objective of learning about the AD-AS model is to understand how:

Equilibrium national income and general price level are determined (C) Signup and view all the answers

What does the study of AD and AS primarily focus on?

The determination of national income and price level (B) Signup and view all the answers

According to the learning objectives, which of the following are to be distinguished in the AD-AS model?

Movements along and shifts of the AD and AS curves (A) Signup and view all the answers

What concept does the use of the AD-AS model NOT directly assist in understanding?

Allocation of resources at an individual firms level (C) Signup and view all the answers

Which of the following is a learning objective explicitly mentioned in the content regarding the AD-AS model?

Explaining the determinants of aggregate supply (B) Signup and view all the answers

Which of the following best describes the relationship between government spending and tax revenue?

Government spending is independent of tax revenue; the government can choose to spend more, less, or the same regardless of tax revenue. (C) Signup and view all the answers

In the context of the Keynesian model, what is assumed about export revenue (X)?

It is autonomous, meaning it is independent of domestic national income. (A) Signup and view all the answers

What is the primary factor influencing the amount foreigners spend on domestic exports?

Foreign national income. (B) Signup and view all the answers

According to the provided text, which of these statements is correct?

Government spending may be more or less than its tax revenue. (D) Signup and view all the answers

Government spending (G) is considered autonomous in the context of the discussion. What does this imply?

Government spending is determined by decisions made independent of national income and tax revenues. (A) Signup and view all the answers

Which best describes how import expenditure (M) responds to changes in domestic national income?

It responds to changes in domestic national income. (A) Signup and view all the answers

What is the direct determinant of a country's export revenue, according to the text?

Foreign incomes. (B) Signup and view all the answers

What is the main purpose behind the government adjusting its spending (G)?

To achieve an economy's macroeconomic goals. (B) Signup and view all the answers

According to the given information, what does the vertical shape of the Long Run Aggregate Supply (LRAS) curve indicate?

The LRAS is perfectly price inelastic. (B) Signup and view all the answers

What primarily determines the position of the Long Run Aggregate Supply (LRAS) curve?

Real factors like labor force, capital stock, and technology. (A) Signup and view all the answers

What is the significance of 'YF' in the given context?

It represents the long-run equilibrium output at full employment. (C) Signup and view all the answers

How is the shape of the Aggregate Supply (AS) curve affected when the economy is in a severe recession?

It becomes flat, indicating significant excess capacity. (B) Signup and view all the answers

What does not directly influence the LRAS?

The price level. (B) Signup and view all the answers

What best describes the state of the economy when operating at the output level denoted by YF?

Operating at full capacity with full employment levels. (C) Signup and view all the answers

How does technological progress affect the LRAS?

It increases the productive capacity, shifting LRAS right. (B) Signup and view all the answers

If the economy is operating at an output level lower than YF but not in a severe recession, what can generally be said about the Aggregate Supply (AS) at that point?

It is more elastic than at YF. (A) Signup and view all the answers

What is the primary purpose of measuring national income at constant prices?

To eliminate the effects of inflation on real output. (A) Signup and view all the answers

If nominal national income increases by 8% and the price level increases by 3%, what is the approximate percentage change in real national income?

5% (D) Signup and view all the answers

What is the key focus when examining the determinants of aggregate demand?

Real values of goods and services (C) Signup and view all the answers

Why is the aggregate demand (AD) curve typically downward sloping?

Because it shows an inverse relationship between price level and quantity demanded. (B) Signup and view all the answers

What does the term 'deflating nominal national income' mean?

Adjusting nominal income to reflect changes in the price level. (D) Signup and view all the answers

Study Notes

Chapter 6: National Income and Determination

This chapter examines the factors influencing national income, focusing on the Keynesian theory and the aggregate demand-aggregate supply (AD-AS) model.
It explores the circular flow of income and expenditure in a 4-sector economy (households, firms, government, and foreign sector).
The AD curve slopes downward, reflecting the inverse relationship between price level and real output (national output). This is due to wealth effects and the competitiveness of exports.
Key determinants of AD include consumption (C), investment (I), government expenditure (G), and net exports (X-M). Consumption is influenced by income (induced consumption) and other factors (autonomous consumption). Investment depends on factors including interest rates, business expectations, and technological progress. Government expenditure is considered autonomous. Net exports are influenced by domestic income, foreign income, relative prices, and exchange rates.
The concept of the multiplier, a numerical coefficient that represents the magnified impact of an autonomous change in spending on national income, is introduced.
The multiplier formula is shown, highlighting how increased spending can generate a larger increase in national income.
Non-price factors affecting the AD curve are discussed, such as changes in economic outlook, interest rates, and foreign incomes. These factors cause shifts in the AD curve.
The short-run aggregate supply (SRAS) curve slopes upward, reflecting the relationship between price level and real output supplied. Its upward slope is because rising prices incentivize firms to produce more.
The long-run aggregate supply (LRAS) curve is vertical, reflecting the economy's full employment output (potential output), unaffected by changes in the price level.
Equilibrium national income and general price level are determined where AD intersects SRAS. Shifts in either curve lead to changes in equilibrium values.
Key macroeconomic aims, such as sustainable growth, price stability, low unemployment, and a favourable balance of trade position, are outlined.
A decision-making example, specifically the Singaporean government's plan to issue GST vouchers to citizens, is analyzed for both its potential benefits and costs.

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Description

This quiz covers Chapter 6 on National Income and Determination, focusing on Keynesian theory and the AD-AS model. It also examines the circular flow of income among different sectors and the key determinants of aggregate demand. Test your understanding of how various factors influence national income and expenditure in a complex economy.