National income, growth and the multiplier practice questions (A-Level Economics)

Sample questions

All 3 free A-Level Economics questions on this topic, from the free A-Level Economics Practice Paper and the free A-Level Economics Multiple Choice Questions with Answers. Each answer is behind its own toggle; the whole paper, its PDF and the full answer key are on the exam page.

1. Question 11 mark · The multiplier effect
   In an economy, the marginal propensity to consume out of additional income is 0.75. The government increases its spending by 2 billion pounds, with no change in taxation. Using the multiplier, the eventual total increase in national income is:
   • A.
     1.5 billion pounds
   • B.
     2.67 billion pounds
   • C.
     6 billion pounds
   • D.
     8 billion pounds
   Show answerFrom the free A-Level Economics Practice Paper →
2. Question 21 mark · The multiplier
   In an economy, out of each additional pound of national income, 0.20 is saved, 0.25 is paid in taxes and 0.15 is spent on imports. Government spending rises by 6 billion pounds. Using the multiplier, the eventual total increase in national income is:
   • A.
     15 billion pounds
   • B.
     30 billion pounds
   • C.
     10 billion pounds
   • D.
     3.6 billion pounds
   Show answerFrom the free A-Level Economics Multiple Choice Questions with Answers →
3. Question 31 mark · Economic growth
   A country's real GDP grows by 3 percent in a year in which its population grows by 1 percent. Real GDP per capita has grown by approximately:
   • A.
     2 percent
   • B.
     4 percent
   • C.
     3 percent, because population growth does not affect GDP per capita
   • D.
     1.5 percent
   Show answerFrom the free A-Level Economics Multiple Choice Questions with Answers →

Key terms

The definitions and formulas A-Level Economics expects for national income, growth and the multiplier, typeset as they appear on the paper.

Circular flow of income

Income flows from firms to households as factor payments and back as spending. Injections (investment, government spending, exports) raise national income; withdrawals (saving, taxation, imports) reduce it. Equilibrium is where injections equal withdrawals.

$$I + G + X = S + T + M$$

The multiplier

The ratio of the final change in national income to the initial change in spending, because one person's spending is another's income. It is larger when the marginal propensity to withdraw is smaller.

$$k = \frac{1}{1 - MPC} = \frac{1}{MPW}, \qquad MPW = MPS + MPT + MPM$$

Marginal propensities

The fraction of each extra pound of income that is consumed, saved, taxed or spent on imports. They sum to one, and the multiplier's size depends entirely on them.

$$MPC + MPS + MPT + MPM = 1$$

Actual and potential growth

Actual growth is the rise in real GDP (AD shifting right along a given AS); potential growth is the rise in productive capacity (LRAS or the PPF shifting outward), from investment, innovation, education and labour supply.

The economic cycle

Boom, downturn, recession (two consecutive quarters of falling real GDP) and recovery. Output gaps, unemployment and inflation move with it, and automatic stabilisers dampen it.

Benefits and costs of growth

Higher incomes, employment and tax revenue against inflation, inequality, environmental damage and current account deficits. Evaluate by distinguishing short run from long run and asking who gains.

Frequently asked questions

Other A-Level Economics topics

• Nature of economics and economic methodology
• How markets work: demand, supply, elasticity
• Market failure and government intervention
• Measures of economic performance
• Aggregate demand and aggregate supply
• Macroeconomic objectives and policies
• Business growth, market structures and the labour market
• Globalisation, trade and exchange rates
• Poverty, inequality and development
• The financial sector

All A-Level Economics topics · A-Level Economics exam guide · All free practice exams