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Explain how economists model how an increase in government expenditure can lead to a greater increase in national income.

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Introduction

Explain how economists model how an increase in government expenditure can lead to a greater increase in national income. Ans. National income is the total amount of wealth that accrues to the permanent residents of a country as a result of the production of goods and services within a country during the course of a year. It is important to measure national income because it shows whether the standard of living in a country is rising or falling and it can be used as a means of comparison between other countries. ...read more.

Middle

An injection is an addition to the circular flow of income. The diagram above illustrates some of the injections and leakages in the economy. It is however very important to find out exactly what will be the effect on the economy from an increase in injections. Economists do this by calculating the multiplier effect of the increase in the government expenditure on the economy. The multiplier indicates how many times that the injection of original spending circulates through a local economy. ...read more.

Conclusion

Some of it is saved. For example if the government's expenditure increases by �10 million, people in the economy will have more money and they will spend more. How much the over all increase in the national incomes takes place will depend on the MPC. If the MPC is 0.5 the multiplier will be 2. This means that the total increase in the national income will be: 10 X 2 = � 20million. The main problem with calculating the multiplier is that extra spending could dissipate in inflation and therefore the true effect if the injections will not be known. ...read more.

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5 star(s)

Response to the question

The author answers the question perfectly. They define all the key terms (National Income) and describe/ explain the multiplier effect, excellently. Good use of diagram to help explain the concept and importantly explains how the diagram relates to the question. ...

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Response to the question

The author answers the question perfectly. They define all the key terms (National Income) and describe/ explain the multiplier effect, excellently. Good use of diagram to help explain the concept and importantly explains how the diagram relates to the question. Also defining key terms at the start of any essay is greatly recommended, as it shows instantly an understanding of the topic.

Level of analysis

The question is only a describe and explain one, so there was no need to analysis. The level of explanation was very good, and would be a good source to turn to for an explanation of the multiplier effect. Also the author brings in a little bit of analysis in the last paragraph by discussing the impact of inflation on measurements, which although brief, works as a good aside.

Quality of writing

Spelling and grammar are absolutely fine, which is obviously a good thing as spelling and grammar may be assessed when being marked. The layout was very good, with paragraphs for each new topic, for instance there was a new paragraph for analysis. Separating work out like this makes your work look clearer and easier to understand. This essay received a full five stars, for answering the question perfectly, with good spelling and a small but good amount of analysis.


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Reviewed by islander15 24/02/2012

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