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Pearson Edexcel IAL Economics 2.3.4 National income Question Bank

Practise national income through circular flow links, injections, withdrawals, multiplier calculations and shifts in equilibrium real output.

Syllabus
First assessment 2019
Course
Economics YEC11
Level
AS

Exam points

  • classify injections and withdrawals from data on spending, exports, savings, tax and imports
  • use tables or extracts to explain how net injections alter the circular flow and real output
  • calculate the multiplier from marginal propensities and interpret changes in its value

Covered syllabus points

2.3.4.1a - circular flow of income2.3.4.1b - distinction between income and wealth2.3.4.2a - distinction between injections and withdrawals. withdrawals2.3.4.2b - Injections: • investment • government expenditure • exports2.3.4.2c - Withdrawals: • savings • taxation • imports2.3.4.2d - impact of net injections into, and net withdrawals from, the circular flow of income2.3.4.3a - concept of equilibrium level of real national output. of real output2.3.4.3b - Causes of changes in equilibrium real national output, as a result of shifts in AD2.3.4.4a - multiplier and multiplier process2.3.4.4b - Marginal propensities and their effects on the multiplier: • the marginal propensity to2.3.4.4c - Calculations of the multiplier using the formula 1/(1-MPC) and 1/MPW, where MPW = MPS +2.3.4.4d - significance of the multiplier for shifts in AD and the level of economic activity

2.3.4 - National income question 1

[Maximum number: 1]

From Quarter 12020 to Quarter 2 2020, government expenditure in Russia increased by 25 billion roubles.

Ceteris paribus, what was the most likely effect of this increase?

A

Aggregate demand decreased

B

Withdrawals from the circular flow increased

C

Aggregate supply decreased

D

Injections into the circular flow increased

2.3.4 - National income question 2

[Maximum number: 8]

Sources for use with Section C
The economy of China

Figure 1 Year on year real GDP growth rate by quarter, Q1 2020 to Q2 2022

Figure 2 Youth unemployment rate (16 to 24 year olds), as measured by the International Labour Organization (ILO), January 2022 to June 2022

Extract A Economic growth In the second quarter of 2022 China experienced a low rate of economic growth. This was as a result of domestic demand for goods and services, and exports rising more slowly compared with the previous quarter. Economists estimated that China’s economy would continue to experience a low rate of economic growth until the end 5 of the year. Therefore, the country’s economic growth forecast for 2022 was reduced from 5.5% to 4.3%. This low economic growth rate resulted in a further increase in the already high rate of youth unemployment. China has too many college and university graduates for the economy to employ. In 2022 there was also a mismatch between the jobs that are 10 available and students’ qualifications. For example, at the start of the third quarter of 2022, only 0.70 jobs were available for each graduate. To increase the rate of economic growth the Government implemented a reflationary fiscal policy. It increased spending on infrastructure by over $75 billion and reduced taxes for businesses. It planned to increase science and technology‑related 15 investments by providing 100% tax breaks on research and development spending. The country’s central bank, the People’s Bank of China (PBoC), implemented a reflationary monetary policy to increase the country’s economic growth rate. For example, the PBoC decreased the base rate of interest from 3.7% to 3.65% in August 2022. There was also a reduction in the reserve asset (liquidity) requirements 20 in November 2022. This was in contrast to the policy of central banks in several advanced economies which implemented deflationary monetary policy. One economist stated that “the room for manoeuvre” for a reflationary monetary policy by the PBoC was limited because of rising US interest rates. He also emphasised the risks associated with a fall in the external value of the Chinese 25 currency, the Renminbi.

With reference to Extract A, examine how a reflationary fiscal policy will impact China's circular flow of income.

2.3.4 - National income question 3

[Maximum number: 4]

Between May 2022 and April 2023 the central bank of Nigeria increased the country's base rate of interest by six percentage points. Draw an AD and LRAS diagram to show the effect of this increase in the base rate of interest on consumption, the price level and real output.

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