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Questions and Answers
Which of the following is included in the calculation of corporate profits?
Which of the following is included in the calculation of corporate profits?
What is the role of taxes on production and imports in the calculation of GDP using the income approach?
What is the role of taxes on production and imports in the calculation of GDP using the income approach?
Why is depreciation/consumption of fixed capital included in the Gross Domestic Product calculation?
Why is depreciation/consumption of fixed capital included in the Gross Domestic Product calculation?
What does the circular flow of income model primarily depict?
What does the circular flow of income model primarily depict?
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In the circular flow of income model, what are considered withdrawals?
In the circular flow of income model, what are considered withdrawals?
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What impact do net foreign factor incomes have on national income?
What impact do net foreign factor incomes have on national income?
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What is the primary purpose of including proprietors’ income in GDP calculations?
What is the primary purpose of including proprietors’ income in GDP calculations?
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Which of the following is NOT a component of the circular flow model?
Which of the following is NOT a component of the circular flow model?
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What does the marginal propensity to consume domestically produced goods (mpcd) represent?
What does the marginal propensity to consume domestically produced goods (mpcd) represent?
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What is the relationship between aggregate demand and national income in the Keynesian model?
What is the relationship between aggregate demand and national income in the Keynesian model?
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What occurs when expenditure (E) is greater than national income (Y)?
What occurs when expenditure (E) is greater than national income (Y)?
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How does a higher marginal propensity to save (MPS) affect the circular flow of income?
How does a higher marginal propensity to save (MPS) affect the circular flow of income?
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What happens when injections fall below withdrawals?
What happens when injections fall below withdrawals?
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What happens when national income reaches equilibrium (Y = E)?
What happens when national income reaches equilibrium (Y = E)?
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What is the multiplier effect in the context of national income?
What is the multiplier effect in the context of national income?
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In the Keynesian model, equilibrium is restored when which conditions are met?
In the Keynesian model, equilibrium is restored when which conditions are met?
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How does the marginal propensity to tax (MPT) impact high-income households?
How does the marginal propensity to tax (MPT) impact high-income households?
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When national income is above the equilibrium level, what is likely to occur?
When national income is above the equilibrium level, what is likely to occur?
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Which statement accurately describes the role of households when national income falls?
Which statement accurately describes the role of households when national income falls?
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What happens if national income falls below the equilibrium level?
What happens if national income falls below the equilibrium level?
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How does a rise in injections affect national income in the Keynesian model?
How does a rise in injections affect national income in the Keynesian model?
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What effect does an increase in wages have on household savings according to the MPS?
What effect does an increase in wages have on household savings according to the MPS?
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What is shown on the vertical axis of a Keynesian diagram depicting withdrawals and injections?
What is shown on the vertical axis of a Keynesian diagram depicting withdrawals and injections?
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What occurs after a fall in household income due to decreased aggregate demand?
What occurs after a fall in household income due to decreased aggregate demand?
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What does the multiplier measure in the context of national income?
What does the multiplier measure in the context of national income?
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Which statement accurately describes the relationship between the marginal propensity to withdraw (mpw) and the multiplier?
Which statement accurately describes the relationship between the marginal propensity to withdraw (mpw) and the multiplier?
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In the context of withdrawals and injections, which of the following represents an injection?
In the context of withdrawals and injections, which of the following represents an injection?
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What happens to national income when injections increase from J1 to J2 according to the withdrawals and injections approach?
What happens to national income when injections increase from J1 to J2 according to the withdrawals and injections approach?
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How is the multiplier formula expressed in terms of marginal propensity to consume domestically (mpcd)?
How is the multiplier formula expressed in terms of marginal propensity to consume domestically (mpcd)?
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According to the income and expenditure approach, what causes the E line to shift?
According to the income and expenditure approach, what causes the E line to shift?
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Why does a larger marginal propensity to withdraw (mpw) lead to a smaller multiplier effect?
Why does a larger marginal propensity to withdraw (mpw) lead to a smaller multiplier effect?
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What is the formula used to calculate the size of the multiplier?
What is the formula used to calculate the size of the multiplier?
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Which of the following is NOT a result of increased tourist spending in the tourism sector?
Which of the following is NOT a result of increased tourist spending in the tourism sector?
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What does the term 'full-employment level of national income' refer to?
What does the term 'full-employment level of national income' refer to?
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What characterizes a recessionary gap?
What characterizes a recessionary gap?
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Which of the following industries benefits directly from increased tourist spending?
Which of the following industries benefits directly from increased tourist spending?
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What is a secondary effect of increased economic activity in the tourism sector?
What is a secondary effect of increased economic activity in the tourism sector?
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What might happen if the equilibrium level of national income exceeds the full-employment level?
What might happen if the equilibrium level of national income exceeds the full-employment level?
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What does the multiplier effect describe in economics?
What does the multiplier effect describe in economics?
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What does a recessionary gap indicate when $Y_e < Y_F$?
What does a recessionary gap indicate when $Y_e < Y_F$?
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How is the multiplier calculated in the Keynesian model?
How is the multiplier calculated in the Keynesian model?
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What policy is recommended to close a recessionary gap?
What policy is recommended to close a recessionary gap?
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What characterizes an inflationary gap?
What characterizes an inflationary gap?
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Which method would NOT help to reduce an inflationary gap?
Which method would NOT help to reduce an inflationary gap?
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What results when real national income exceeds the full employment level $Y_F$?
What results when real national income exceeds the full employment level $Y_F$?
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At equilibrium national income $Y_e$, what do withdrawals equal?
At equilibrium national income $Y_e$, what do withdrawals equal?
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How can closing a recessionary gap impact demand-deficient unemployment?
How can closing a recessionary gap impact demand-deficient unemployment?
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Study Notes
Unit 7: Macroeconomics and National Income, Week 8
- Macroeconomics is concerned with the overall economy. It examines key issues like national output, unemployment, inflation, the financial system, and international economic relationships.
- Subtopics covered in this week include Gross Domestic Product (GDP), the circular flow of income, the Keynesian model of national income, and the multiplier effect.
- Macroeconomic goals include economic growth, low unemployment, low inflation, a stable financial system, avoidance of balance of payments deficits, and stable exchange rates.
- Government plays a crucial role in achieving these goals through fiscal and monetary policies.
- Fiscal policy manages government spending and taxation.
- Monetary policy focuses on the money supply and interest rates.
- Macroeconomics considers the interactions among households, firms, the government, and the rest of the world.
Gross Domestic Product (GDP)
- GDP measures the market value of all final goods and services produced within a country during a specific time period.
- GDP is a monetary measure that allows comparison of different goods and services across time.
- GDP avoids double counting by only including the value of final goods and services, not intermediate goods. This ensures that the calculation reflects the value added at each stage of production.
- Non-production transactions, such as the sale of existing assets or financial transactions, are excluded from GDP calculations.
Measuring GDP
- GDP can be calculated using either the expenditure approach or the income approach.
- The expenditure approach sums all spending on final goods and services by different groups (households, businesses, government, and foreigners).
- Household consumption includes durable and non-durable goods and services.
- Gross private domestic investment encompasses new capital goods, construction, and changes in business inventories.
- Government purchases include all government spending on goods and services.
- Net exports represent the difference between exports and imports.
- The income approach sums all income earned by households and businesses for producing final goods and services.
- This includes wages, salaries, rent, interest, and profits.
- Adjustments to national income are made to obtain GDP (e.g., taxes on production and imports, depreciation, and net foreign factor income).
The Circular Flow of Income Model
- The circular flow model illustrates the flow of money between households and firms in an economy.
- Withdrawals (W) represent money leaving the circular flow (savings, taxes, and imports).
- Injections (J) represent money entering the circular flow (investments, government spending, and exports).
- Equilibrium in the circular flow model occurs when injections equal withdrawals.
Equilibrium in the Circular Flow
- The circular flow model helps understand how aggregate demand (AD) fluctuations affect national income.
- When injections exceed withdrawals, national income increases.
- When withdrawals exceed injections, national income decreases.
- Disequilibrium leads to a chain reaction that moves the economy back towards equilibrium.
Simple Keynesian Model of National Income Determination
- This model explains the relationship between national income, consumption, withdrawals, and injections.
- It was developed by John Maynard Keynes to analyze the Great Depression.
- The model helps understand how changes in aggregate demand affect national income.
How Changes in AD Affect National Income
- A change in aggregate demand (AD) affects national income, usually through the multiplier effect.
- Changes in injections or withdrawals create a chain reaction in the economy.
- This leads to an amplified change in national income, exceeding the initial change in injections or withdrawals.
The Multiplier
- The multiplier indicates the magnitude of the change in national income resulting from a change in injections or withdrawals.
- The multiplier is a factor (greater than 1) used to calculate the overall impact on the national income from a change in aggregate expenditure.
- It is determined primarily by the marginal propensity to consume (MPC) or, alternatively, by the marginal propensity to withdraw (MPW).
The Multiplier in the Real World
- Tourism sector growth stimulates economic activity, boosting income and employment through international tourist spending.
- Taxes, saving rates, and import rates all influence the size and effectiveness of the multiplier.
Multiplier and the Full-Employment Level of National Income
- Keynesian theory suggests a maximum level of national income.
- This maximum level is often referred to as the full-employment level (YF) of national income.
- Actual national income (Ye) can fall below or exceed this full-employment level; either scenario can result in a recessionary or inflationary gap.
- The multiplier effect applies to both recessionary and inflationary gaps.
Recessionary Gap
- Occurs when national expenditure in an economy falls short of full-employment GDP.
- The Keynesian model suggests that increased injections (e.g. increased government spending) can close the gap.
Inflationary Gap
- Occurs when national expenditure is beyond the full-employment GDP.
- This situation usually results in demand-pull inflation in the economy, where the pressure from high demand drives up prices.
- Keynesian theory recommends a decrease in injections for closing the gap.
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Description
This quiz covers key concepts in macroeconomics, focusing on national income and related topics during Week 8. Explore the role of GDP, the circular flow of income, and the effects of fiscal and monetary policies on economic growth and stability. Test your understanding of macroeconomic goals and the Keynesian model of national income.
