Measuring the total economic activity of a nation is crucial for planning policy. National income (or GDP) measures the total value of all goods and services produced within a specific period. But GDP is dynamic; it responds to shifts in spending. As stated in the text, ‘When initial injections—such as business investment or government spending—into the circular flow of income rise, they trigger a series of second-round spending effects that lead to a multiple increase in national output.’ The final impact depends heavily on leakages from the circular flow, such as savings, taxes, and imports, which determine the marginal propensity to withdraw.
Extract C states ‘When initial injections... into the circular flow of income rise, they trigger a series of second-round spending effects that lead to a multiple increase in national output.’
With the help of a diagram, explain how an increase in injections into the circular flow of income can lead to a multiple expansion of an economy's GDP.
222 exam-style questions on AQA A Level Economics 2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts, covering 2.2.1 The circular flow of income, 2.2.2 Aggregate demand and aggregate supply analysis, 2.2.3 The determinants of aggregate demand, 2.2.4 Aggregate demand and the level of economic activity, 2.2.5 Determinants of short-run aggregate supply, and 2.2.6 Determinants of long-run aggregate supply. Each one has a worked solution and a mark scheme showing where the marks go.