Economics

Jamie Halvorson 5. Falls in the level of our National Income have affected the government, individuals and the value of our marginal propensity to consume (MPC). (a) Explain what is meant by the circular flow of income and National Income equilibrium. Your explanations must include a diagram. 10 (b) Explain how a fall in the level of National Income can create problems for: (i) A government; (ii) An individual. 6 (c) (i) Describe what is meant by the multiplier. (ii) Explain the relationship between the MPC and the multiplier. 9 (a) The circular flow is a representation of the income in the economy, also, it shows how this income travels around the economy. The diagram below shows that money (income) is transferred back and from firms and households. Without the households firms would not have a workforce, and without firms, households would not have wages to pay for things such as rent. The circular flow is said to be in equilibrium only when all of the leakages are equal to all of the injections. The leakages are as follows: imports Tax Savings These leakages cause an unequal distribution of income.? As I already said, the economy is in equilibrium when all of the leakages are equal to the following injections: Government Spending Investment Exports

Again, hard to say without proper formatting but from what I have seen I would give 6 out of the 10. (b) (i) Firstly, a fall in national income would have an Effect on the revenue gained by a government through taxation. If the level of national income were low, there would be a high level of unemployment leading to less people paying tax. The fall in national income may be due to or also lead to, low productivity. This low productivity would cause prices for goods to rise and the level of exports to fall, this would cause a negative effect on the balance of payments. Due to national income being low and unemployment being high, there would be a large amount of people claiming benefits, as they are not earning an income. This would also dig away at the governments revenue.

(ii) If the national income was low, this would cause problems for an individual as well as the government, these problems may be: That they themselves are pushed into unemployment due to a low demand for the products they may produce. An individuals living standard may decline as they will be earning less or living of benefits, this would cause the demand for such goods as prestige goods or luxury goods to decline. Instead, the individual would only be able to afford necessities and inferior goods. Also, an individuals health may fall due to the high stress of being out of work. Good 5 out of 6. (c)(i) The multiplier is a basic economic theory, the theory is basically that new and existing jobs will create new jobs, these new jobs will go on to create further employments and so on. For example, If the government decided to build a new hospital we would see that firstly, architects, builders, plumbers, designers etc. would be needed to build the hospital. We then see that there would be an increase in machines such as the ECG machine, hospital beds, surgery equipment, all of the basic hospital needs, people will need to be employed to create these goods. Finally, we see that doctors, nurses, janitors are needed to staff the entire hospital, therefore creating even more jobs. Since there has been an increase in employment in a certain area we would see that these people would have an increase in their disposable income, they will then spend this money in the economy, thus creating more jobs. It has also been said that even the increase in construction workers would cause an increase in demand for caf goods in a certain area, once again increasing demand for labour as labour is a derived demand and thus creating more jobs. (ii) The marginal propensity to consume, is if someone was to get for example, a pay rise, how much of that pay rise would they spend in the economy. This is calculated by the formula: MPC = change in consumption / change in income If some one has a marginal propensity to consume of say 0.8, then 80% of their income goes into their general consumption. The higher someones MPC, the larger affect it will have as a multiplier in the economy, this is due to labour being a derived demand and the consumers demand increasing (therefore increasing the demand for labour). If the government was to give tax breaks or re-bates they would most likely do this to the poorer end of the economy has their MPC is much greater than their MPS, meaning that they will spend more of the marginal pound in the economy. Really good 9 out of 9 20 out of 25.