8. (a) The diagram below represents the Circular Flow of Income in an economy without government or international trade - Leaving Cert Economics - Question 8 - 2015
Question 8
8. (a) The diagram below represents the Circular Flow of Income in an economy without government or international trade.
Copy the diagram into your answerbook. Clea... show full transcript
Worked Solution & Example Answer:8. (a) The diagram below represents the Circular Flow of Income in an economy without government or international trade - Leaving Cert Economics - Question 8 - 2015
Step 1
Copy the diagram into your answerbook. Clearly label each of the lines 1 to 3.
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Answer
1: Supply factors of production to firms.
2: Spending / payment for goods and services.
3: Households receive factor income for supplying inputs (factors of production).
Step 2
Explain the types of transactions / activities which take place between households and firms.
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Answer
Households act as suppliers by providing factors of production (labor, land, capital) to firms in exchange for income, such as wages. In return, firms sell commodities (goods and services) to households, who spend their income to purchase these products.
Step 3
Is Ireland an open economy? Explain your answer.
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Yes, Ireland is an open economy as it engages in international trade. This involves both importing and exporting goods and services, thereby integrating with the global economy.
Step 4
Explain the underlined term.
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Answer
Income earned by the permanent residents of a country from current economic activity in one year.
Step 5
State what each of the letters I, X and M stand for.
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Outline two possible reasons for this increase in consumer spending.
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Increase in employment: More jobs lead to higher disposable income.
Decrease in income tax: The government reduced the rate of tax, giving consumers more disposable income to spend.
Step 7
Explain the terms MPM and MPS.
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MPM: Marginal Propensity to Import - the proportion of extra income spent on imports.
MPS: Marginal Propensity to Save - the proportion of extra income that is saved.
Step 8
Calculate, using the above formula, the size of the Multiplier.
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Answer
Using the formula, the size of the Multiplier is calculated as follows:
Multiplier=MPS+MPM1=0.2+0.31=0.51=2
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