Economics A2 · The macroeconomy. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
Income flows between households and firms. Saving, taxation and imports are withdrawals from this flow. Investment, government spending and exports are injections. National income is in equilibrium when planned injections equal planned withdrawals, which is also where aggregate expenditure equals output.
An extra injection becomes someone’s income. Part of it is spent again, part leaks out, and the process repeats. The final rise in income is therefore larger than the first injection. The ratio of the two is the multiplier. The larger the withdrawals from each extra dollar, the smaller the multiplier.
Equilibrium income need not be the full employment level. The difference in spending is an inflationary or a deflationary gap.
Students use only the marginal propensity to save in an open economy with a government. Add all three withdrawals (mps + mrt + mpm) before dividing into 1.
Answer: National income eventually falls by $60bn.
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