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
Supply factors of production to firms.
Spending / payment for goods and services.
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 engage in two primary transactions:
Supply Factors of Production: Households provide labor, land, and capital to firms in exchange for income, which forms the backbone of economic activity.
Consumption of Goods and Services: Firms produce commodities that households purchase, initiating a flow of money back to firms as households spend their income.
Step 3
Is Ireland an open economy? Explain your answer.
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Yes, Ireland is considered an open economy. An open economy engages in trade with other countries, importing and exporting goods and services. This economic interaction allows for greater market access and resource diversification, leading to increased efficiency and economic growth.
Step 4
Explain the underlined term.
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The term 'National Income' refers to the total income earned by the permanent residents of a country from current economic activity in one year. It encapsulates wages, profits, rents, and taxes, minus subsidies, reflecting the overall economic output.
Step 5
State what each of the letters I, X and M stand for.
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Answer
I: Investment expenditure
X: Exports
M: Imports
Step 6
Outline two possible reasons for this increase in consumer spending.
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Increase in Employment: The rise in employment boosts disposable income, leading to greater purchasing power among consumers who are inclined to spend more on goods and services.
Competitive Credit Terms: Car dealerships are offering 0% finance deals which encourage consumers to buy big-ticket items, stimulating increased consumer spending.
Step 7
Explain the terms MPM and MPS.
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Answer
MPM: Marginal Propensity to Import
The proportion of extra income which is spent on imports.
MPS: Marginal Propensity to Save
The proportion of extra income which is saved.
Step 8
Calculate, using the above formula, the size of the Multiplier. (Show all your workings.)
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Answer
Using the formula for the Multiplier:
Multiplier = rac{1}{MPS + MPM}
Substituting the assumed values:
Multiplier = rac{1}{0.2 + 0.3} = rac{1}{0.5} = 2
Thus, the size of the Multiplier is 2.
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