Investment Multiplier and International Trade
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Investment Multiplier and International Trade

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Questions and Answers

What happens when leakages are more powerful?

  • The value of the multiplier increases
  • Economic growth accelerates
  • The value of the multiplier decreases (correct)
  • Total expenditure increases

    • What is indicated by a high level of HPC in underdeveloped countries?

  • Low consumer demand
  • High production efficiency
  • Low investment in infrastructure
  • High consumption compared to production (correct)

    • Which of the following is a cause of leakages in an economy?

  • Decreased demand for taxes
  • Higher distribution of company profits
  • Higher taxes (correct)
  • Increased investment in consumer goods

    • What effect do structural inadequacies have in underdeveloped countries?

    <p>Inflate prices</p> Signup and view all the answers

    What results from a decrease in MPC?

    <p>Increased savings rates</p> Signup and view all the answers

    What does the investment multiplier formula represent?

    <p>The ratio of change in income to change in investment</p> Signup and view all the answers

    If the investment multiplier is given as 5, what can be inferred?

    <p>A change in income is five times the change in investment</p> Signup and view all the answers

    What is a likely factor that can stop the flow of money in the investment multiplier concept?

    <p>Leakages, such as savings</p> Signup and view all the answers

    Which of the following is NOT a sector involved in the flow of money described by the investment multiplier?

    <p>Real estate</p> Signup and view all the answers

    In the context of the investment multiplier, what does $ rac{eta Y}{eta I}$ represent?

    <p>The change in income relative to change in investment</p> Signup and view all the answers

    What happens to the multiplier (K) when the Marginal Propensity to Consume (MPC) increases?

    <p>The multiplier increases.</p> Signup and view all the answers

    Which of the following statements correctly describes the relationship between Marginal Propensity to Save (MPS) and the multiplier (K)?

    <p>MPS increases lead to K decreases.</p> Signup and view all the answers

    In the relationship between income (Y) and aggregate demand (AD), what is the general trend when income increases?

    <p>Aggregate demand increases.</p> Signup and view all the answers

    If the Marginal Propensity to Save (MPS) is 0.2, what is the associated multiplier (K) value?

    <p>1.25</p> Signup and view all the answers

    What does the equation $AD = C + I + ∆I$ represent in the context of aggregate demand?

    <p>Aggregate demand is a function of consumption, investment, and changes in investment.</p> Signup and view all the answers

    What does the equation Y = C + I + G represent in an economy?

    <p>Equilibrium condition</p> Signup and view all the answers

    In the equation S + T = I + G, what does S represent?

    <p>Savings</p> Signup and view all the answers

    At equilibrium, what does Y equal according to the notes?

    <p>Aggregate Demand (AD)</p> Signup and view all the answers

    Which of the following components must equal government spending (G) when combined with investment (I) according to the equilibrium condition?

    <p>Savings (S) and taxes (T)</p> Signup and view all the answers

    What does the vertical line in the diagram likely represent?

    <p>Aggregate Demand (AD)</p> Signup and view all the answers

    What are the main roles of households in the circular flow of income?

    <p>Consuming goods and services and paying taxes</p> Signup and view all the answers

    Which payment type flows from firms to households?

    <p>Factor Payments</p> Signup and view all the answers

    What constitutes a leakage in the circular flow of income?

    <p>Savings</p> Signup and view all the answers

    What do firms receive from households in this economic model?

    <p>Goods and services</p> Signup and view all the answers

    What is the role of the government in the circular flow of income?

    <p>Funding public services and collecting payments from households and firms</p> Signup and view all the answers

    Which of the following represents an injection into the circular flow?

    <p>Investment Expenditure</p> Signup and view all the answers

    What happens to a portion of household income?

    <p>Some is saved</p> Signup and view all the answers

    Which component is NOT directly shown in the circular flow diagram?

    <p>Exports</p> Signup and view all the answers

    What role does the international/foreign sector play in the circular flow of income?

    <p>Facilitates both imports and exports, impacting income flow.</p> Signup and view all the answers

    Which of the following is considered a leakage in the circular flow of income?

    <p>Savings accumulated by households.</p> Signup and view all the answers

    Which component represents an injection into the circular flow of income?

    <p>Exports of goods and services.</p> Signup and view all the answers

    How do subsidies provided by the government affect the circular flow of income?

    <p>They increase the flow of money by acting as injections.</p> Signup and view all the answers

    What do taxes collected from households represent in the circular flow model?

    <p>A leakage from the circular flow.</p> Signup and view all the answers

    What does the letter 'G' represent in the equilibrium condition formula?

    <p>Government spending</p> Signup and view all the answers

    In the formula Y = C + I + G, which variable represents disposable income?

    <p>Yd</p> Signup and view all the answers

    What happens to the equilibrium income Y when government spending (G) increases?

    <p>Y increases</p> Signup and view all the answers

    In the equation Y = a + bYd + I + G, what does 'a' represent?

    <p>Autonomous consumption</p> Signup and view all the answers

    What does the term (1 - b) signify in the equilibrium equation Y = 1/(1-b) [a - bT + I + G]?

    <p>The marginal propensity to save</p> Signup and view all the answers

    What condition must be satisfied for an economy to achieve equilibrium?

    <p>AS = AD</p> Signup and view all the answers

    Which equation correctly represents the relationship between national income and aggregate demand?

    <p>Y = AD</p> Signup and view all the answers

    What does the equation $C + S + T + M = I + G + X$ signify in macroeconomics?

    <p>The balance between consumption and investment</p> Signup and view all the answers

    How do imports affect the overall economy in the context of the balance of trade?

    <p>They can lead to a trade deficit if they exceed exports</p> Signup and view all the answers

    Which of the following components is not part of the aggregate supply equation?

    <p>Investment (I)</p> Signup and view all the answers

    What is the formula for the foreign trade multiplier (FTM)?

    <p>$FTM = rac{1}{1 - b + m}$</p> Signup and view all the answers

    In the equilibrium condition equation $Y = a + b(Y - T) + I + G + X - M$, what does the variable 'T' represent?

    <p>Taxes</p> Signup and view all the answers

    What does the term 'm' represent in the foreign trade multiplier formula?

    <p>Marginal leakage from foreign trade</p> Signup and view all the answers

    If the foreign trade multiplier is calculated to be 5, what can be inferred about the overall impact of changes in trade?

    <p>For every unit change in trade, income will change by 5 units.</p> Signup and view all the answers

    What does autonomous expenditure represent in an economy?

    <p>Spending that remains constant regardless of income</p> Signup and view all the answers

    In the relationship between national income and exports/imports, which equation is used?

    <p>$Y = a + bY_0 + I + G + X + M$</p> Signup and view all the answers

    What is primarily affected by changes in current income?

    <p>Induced expenditure</p> Signup and view all the answers

    What does equilibrium in an economy refer to?

    <p>The point where aggregate supply equals aggregate demand</p> Signup and view all the answers

    Which of the following is NOT an element of the economic analysis presented?

    <p>Tariffs</p> Signup and view all the answers

    In the context of economic modeling, what does the expression $(1 - b(1 - t))$ suggest?

    <p>A relationship between income and induced expenditure</p> Signup and view all the answers

    What do transfers (TR) refer to in an economic context?

    <p>Government payments to individuals in need</p> Signup and view all the answers

    Which result is expected when aggregate demand exceeds aggregate supply?

    <p>Inflationary pressure</p> Signup and view all the answers

    Which type of expenditure is independent of income levels?

    <p>Autonomous expenditure</p> Signup and view all the answers

    Study Notes

    Investment Multiplier

    • The investment multiplier (K) is the ratio of change in income (∆Y) to change in investment (∆I).
    • The formula for the investment multiplier is: K = ∆Y/∆I.
    • Higher marginal propensity to consume (MPC) leads to a higher multiplier.
    • Higher marginal propensity to save (MPS) results in a lower multiplier.
    • Leakages, like savings, can hinder the multiplier process.
    • In underdeveloped countries, high MPC might not lead to higher production, often resulting in price hikes due to structural inadequacies.

    International Trade

    • The concept of the investment multiplier is used in analyzing the impact of international trade on the economy.
    • Exports (X) are considered injections into the circular flow of income, while imports (M) are leakages.

    Equilibrium Condition

    • The equilibrium condition in a closed economy is reached when aggregate supply (AS) equals aggregate demand (AD).
    • This can be represented by the equation: Y = C + I + G, where Y is national income, C is consumption, I is investment, and G is government spending.
    • An alternate representation of equilibrium is S + T = I + G, where S is savings and T is taxes.
    • The equilibrium condition emphasizes the equality of savings and investment, alongside government spending and tax revenue.

    Circular Flow of Income - 3 Sectors

    • The circular flow of income model depicts the flow of money and goods/services between three sectors: households, firms, and the government.
    • Households receive income from firms as factor payments and spend it on consumption goods.
    • Firms produce goods and services, pay factor payments to households, and pay taxes to the government.
    • The government collects taxes from households and firms and spends on public services and goods.
    • Leakages are withdrawals from the circular flow, such as savings, taxes, and imports.
    • Injections are additions to the circular flow, including investment.

    Circular Flow - 4 Sectors

    • The four-sector model includes the international sector along with households, firms, and the government.
    • The international sector involves exports and imports of goods and services.
    • Money flows out of the domestic economy for imports and into the domestic economy for exports.

    Notes on Macroeconomics

    • Notes in the image focus on the relationship between key macroeconomic variables like aggregate demand (AD), aggregate supply (AS), consumption (C), savings (S), investment (I), government spending (G), and net exports (X-M).
    • Equilibrium is achieved when AD equals AS.
    • The relationship between different variables is demonstrated through equations and diagrams.
    • The notes likely discuss concepts like the foreign trade multiplier and how it affects the economy.

    Foreign Trade Multiplier

    • The foreign trade multiplier (FTM) is used to analyze the impact of changes in exports and imports on national income.
    • It is calculated as: FTM = 1 / (1 - b + m), where b is the MPC and m is the marginal propensity to import (the ratio of change in imports to change in income).
    • A higher marginal propensity to import reduces the multiplier.

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    Description

    This quiz covers the concepts of the investment multiplier, its formula, and its relation to international trade. It explores how marginal propensities affect the multiplier and the equilibrium condition in an economy. Test your understanding of these economic principles!

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