2.4 + 2.5 + 2.6

What is the circular of income and what are the injections and withdrawals

Households supply firms with FOP and in return they receive wages, rents and dividends, firms supply goods and services which consumers pay for

• therefore income = output = expenditure

Injections : investment, gov spending and exports

Withdrawals : saving, taxes and imports

What is the distinction between income and wealth

• income is a flow of money which goes towards factors of production eg: wages and interest

• wealth is a stock of assets eg: savings and property

What is the impact of injections and withdrawals

Equilibrium : injections = withdrawals

• if there’s net injections there will be an expansion of national output

• if there’s net withdrawals there will be a contraction of production so output decreases

What’s the multiplier ratio

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

• occurs when there’s new demand in the economy leading into an injection of more income into the circular flow causing economic growth - more jobs, higher average incomes, more spending

Impacts of the MP’s on the multiplier

• MPC - higher the MPC the higher the size of the multiplier

• MPS - if this is bigger than the MPC the multiplier will be small

• MPT - higher the rate of tax, less disposable income leading to small multiplier

• MPM - if more is spent on imports the size of the multiplier falls

How is the multiplier calculated

• 1%(1-MPC)

• 1%MPW

What are the causes of economic growth

Improvement to the quality or quantity of factors of production

What the distinction between actual and potential growth

• actual - % increase in real GDP

• potential - expansion of productive potential of an economy

What are output gaps

The difference between actual growth rates and long term trends in growth rates

What is the business cycle

Refers to the stage of economic growth that the economy is in eg booms and recessions

What is monetary policy

Controlling the money flow within the economy

• interest rates

• quantitive easing through asset purchases

What factors may act as barriers to monetary policy

• Banks might be unwilling to lend

• Low consumer confidence

What is fiscal policy

Government spending and taxation

What is expansionary fiscal policy

Increase AD through increasing spending or reducing taxes

What is deflationary fiscal policy

Decrease AD by cutting spending or increasing taxes to reduce consumer spending

What factors may act as barriers to fiscal policy

• Imperfect information

• Time lag 18-24months

• High interest rates

What is an example of monetary policy in action

UK and USA used quantitive easing in addition to record low interest rates to stimulate the economy after the global financial crisis

What is an example of fiscal policy in action

UK cut public sector wages and unemployment benefits whilst also raising income tax to balance the budget

What is the distinction between market based and interventionist policies

Market based - allowing the free market to flourish

Interventionist - rely on government intervention

What is the purpose of market based policies

• increase incentives - reduce tax and benefits

• promote competition - improve economic efficiency

• reform the labour market - reduce NMW + trade union power

What is the purpose of interventionist policies

• promote competition - reduce monopoly and allow smaller firms to compete

• reform the labour market

• quality of labour force - education

• infrastructure