The circular flow of income model: Model to explain the concept of national income equilibrium

Overview

Recall questions on The model to explain the concept of national income equilibrium and to explain how changes in injections and withdrawals might lead to changes in the equilibrium level of national income.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What happens to national income when injections exceed withdrawals, and why?

   Model answer

   National income rises because there is net additional spending in the economy.

2. 2

   Explain the effect on national income when withdrawals exceed injections.

   Model answer

   National income falls because spending is being removed from the economy.

3. 3

   Define the multiplier process.

   Model answer

   The multiplier process describes how an initial change in injections leads to a larger final change in national income.

4. 4

   Explain why an initial injection creates income for recipients.

   Model answer

   The initial injection represents spending, which becomes income for those who receive payment for providing goods, services, or factors of production.

5. 5

   What do recipients do with the income they receive from an injection that causes the multiplier effect to continue?

   Model answer

   Recipients spend a proportion of this income, which creates further income for others.

6. 6

   Why does the multiplier process eventually come to an end rather than continuing indefinitely?

   Model answer

   The process continues with diminishing amounts at each round because withdrawals reduce the amount re-spent at each stage.

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