Ch41 Circular Flow of Income

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What is the multiplier process?

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The multiplier process explains how an initial change in spending in an economy produces a final rise in GDP. It is calculated as the change in income divided by the change in spending.

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How is the multiplier calculated in a two-sector economy?

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In a two-sector economy, the multiplier is calculated using the formula: k = 1/ mps, where mps is the marginal propensity to save.

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What is a closed economy?

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A closed economy is one that does not trade with other economies.

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What is an open economy?

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An open economy is involved in trade with other economies.

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What is aggregate expenditure?

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Aggregate expenditure is the total amount spent at different levels of income in a given time period. It consists of consumption (C), investment (I), government spending (G), and net exports (X – M).

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What are the determinants of consumption?

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Determinants of consumption include income, rate of interest, and expectations. Consumption usually increases with an increase in income, decreases with a rise in interest rates, and varies with consumer expectations about future incomes.

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What is autonomous consumption?

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Autonomous consumption does not vary with income.

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What is induced consumption?

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Induced consumption is dependent on the level of income.

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What are the determinants of investment?

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Determinants of investment include rate of interest, technological change, expectations, and government policy. High interest rates make borrowing expensive, technological change prompts investment, positive expectations encourage investment, and government policies like tax breaks can stimulate investment.

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What is autonomous investment?

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Autonomous investment occurs independently of a change in income.