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National Income — Exam Questions & Model Answers

Section 2.3.4 — Annotated model answers for the circular flow of income, injections, withdrawals, and the multiplier.

Economics · WEC12 · Unit 2 · 2.3.4

Exam questions

Every question here carries a tariff that exists in IAL Economics. Open the mark scheme before the model answer and you will see what the examiner is paid to look for.

  1. Examine8 marksAO1 · AO2 · AO3 · AO411 min

    Examine how the circular flow of income model shows the impact of injections and withdrawals on national income.

    Mark scheme
    Examine (8)
    Appendix 6: Requires knowledge, understanding, application, analysis and evaluation. Requires an explanation which includes a chain of reasoning, and diagrams where appropriate. Focuses on depth rather than breadth. Any relevant data provided needs to be interpreted. There should be a brief assessment of the arguments/factors/evidence.
    Level 1 — 1–2 marks
    Isolated knowledge and understanding. No application to the context and no chain of reasoning.
    Level 2 — 3–4 marks
    Knowledge applied to the context. A chain of reasoning is begun but not carried through; any data given is described rather than interpreted.
    Level 3 — 5–6 marks
    A developed chain of reasoning in context, with a diagram where one is appropriate. Depth rather than breadth; data interpreted. Assessment is implied rather than made.
    Level 4 — 7–8 marks
    A developed chain of reasoning in context AND a brief assessment of the arguments, factors or evidence — the clause that separates Examine from Analyse.
    Indicative content
    Knowledge: definition of circular flow model, injections and/or withdrawals. Application: identification of specific injections (I, G, X) and withdrawals (S, T, M) with examples. Analysis: developed chain — when injections exceed withdrawals, national income rises via multiplier; when withdrawals exceed injections, it contracts.
    Model answer — 5–6 / 8
    What the marks in the margin meanKKnowledgeAApplicationAnAnalysis chain

    Para 1

    The circular flow of income model shows how money flows between households and firms in an economy. K Households provide factors of production (land, labour, capital, enterprise) to firms and receive factor incomes (rent, wages, interest, profit) in return. Households then spend this income on goods and services produced by firms, completing the flow. K

    Para 2

    Injections are additions to the circular flow that increase national income. They consist of investment (I) by firms, government spending (G), and export revenue (X). K For example, government spending on the NHS pays wages to doctors and nurses, adding income to the flow. A Withdrawals (or leakages) are removals from the circular flow: saving (S), taxation (T), and import spending (M). K When households save rather than spend, that income does not flow back to firms, reducing overall economic activity. An

    Para 3

    When injections exceed withdrawals (I + G + X > S + T + M), national income rises. An This increase is amplified by the multiplier effect — an initial injection of spending generates successive rounds of income and re-spending. For example, a £1bn increase in government infrastructure spending creates jobs and wages, which are partly re-spent on goods and services, creating further income for other firms and workers. A Conversely, when withdrawals exceed injections, national income contracts — firms receive less revenue, reduce output, and may lay off workers, leading to a negative multiplier effect. An The economy reaches equilibrium when total injections equal total withdrawals, and national income is stable. An
    Examiner commentary
    The model is set out accurately and the chain is developed: injections and withdrawals defined, the multiplier mechanism explained with a concrete infrastructure example, and the equilibrium condition stated. A labelled circular flow diagram would earn the diagram credit. It stops at Level 3 because no assessment is made — the mechanism runs and nothing is weighed. Two sentences would lift it: the size of the change in national income depends on the marginal propensity to withdraw, so the same injection moves a high-tax, import-heavy economy far less than the bare model suggests.

  2. Examine8 marksAO1 · AO2 · AO3 · AO411 min

    Examine how the multiplier effect works and why the multiplier may be smaller than expected.

    Mark scheme
    Examine (8)
    Appendix 6: Requires knowledge, understanding, application, analysis and evaluation. Requires an explanation which includes a chain of reasoning, and diagrams where appropriate. Focuses on depth rather than breadth. Any relevant data provided needs to be interpreted. There should be a brief assessment of the arguments/factors/evidence.
    Level 1 — 1–2 marks
    Isolated knowledge and understanding. No application to the context and no chain of reasoning.
    Level 2 — 3–4 marks
    Knowledge applied to the context. A chain of reasoning is begun but not carried through; any data given is described rather than interpreted.
    Level 3 — 5–6 marks
    A developed chain of reasoning in context, with a diagram where one is appropriate. Depth rather than breadth; data interpreted. Assessment is implied rather than made.
    Level 4 — 7–8 marks
    A developed chain of reasoning in context AND a brief assessment of the arguments, factors or evidence — the clause that separates Examine from Analyse.
    Indicative content
    Knowledge: definition of multiplier, formula (1/(1-MPC)). Application: numerical example or real-world context. Analysis: rounds of spending, leakages reducing the multiplier, reasons for smaller-than-expected effect.
    Model answer — 7–8 / 8
    What the marks in the margin meanKKnowledgeAApplicationAnAnalysis chain

    Para 1

    The multiplier effect describes how an initial change in spending leads to a larger final change in national income. K The multiplier is calculated as 1 / (1 – MPC), where MPC is the marginal propensity to consume. If MPC = 0.8, the multiplier is 5 — an initial £1bn injection leads to a £5bn increase in GDP. K

    Para 2

    The mechanism works through successive rounds of spending. When the government invests £1bn in infrastructure, construction workers receive income. A If their MPC is 0.8, they spend £800m — which becomes income for retailers, suppliers, and service providers. Those recipients then spend 80% of their new income (£640m), and so on. An Each round generates new income, creating a cumulative increase far larger than the initial injection. An

    Para 3

    However, the multiplier is often smaller than theory suggests because of leakages from the circular flow. An In each round, income leaks out through savings (reducing re-spending), taxation (government takes a share), and imports (spending on foreign goods does not generate domestic income). An In an open economy like the UK — with high income tax, high import penetration, and a modest savings rate — the multiplier may be closer to 1.3–1.5 rather than the theoretical 5. A Additionally, if the economy is near full capacity, extra spending may cause inflation rather than increasing real output, further reducing the effective multiplier. An
    Examiner commentary
    The mechanism is developed concretely, and the £1bn → £800m → £640m walkthrough makes the rounds of spending visible. Level 4 is earned because the answer then assesses the mechanism rather than trusting it: leakages through saving, tax and imports are set against the theoretical value, the practical UK multiplier of 1.3–1.5 is contrasted with the textbook 5, and the capacity constraint is added as a further limit. That is a brief assessment, made.
    Why this loses marks — a mid-band attempt at the same question

    Not a real script, and not written for this panel. It is 2 of 3 paragraphs of the model answer above, with “Para 3” removed. Nothing is rewritten. Open the model answer above and the difference is exactly the paragraphs named here.

    What the marks in the margin meanKKnowledgeAApplicationAnAnalysis chain

    Para 1

    The multiplier effect describes how an initial change in spending leads to a larger final change in national income. K The multiplier is calculated as 1 / (1 – MPC), where MPC is the marginal propensity to consume. If MPC = 0.8, the multiplier is 5 — an initial £1bn injection leads to a £5bn increase in GDP. K

    Para 2

    The mechanism works through successive rounds of spending. When the government invests £1bn in infrastructure, construction workers receive income. A If their MPC is 0.8, they spend £800m — which becomes income for retailers, suppliers, and service providers. Those recipients then spend 80% of their new income (£640m), and so on. An Each round generates new income, creating a cumulative increase far larger than the initial injection. An

    The band this attempt cannot reach

    Level 4 — 7–8 marks
    A developed chain of reasoning in context AND a brief assessment of the arguments, factors or evidence — the clause that separates Examine from Analyse.

    Where it tops out instead

    Level 3 — 5–6 marks
    A developed chain of reasoning in context, with a diagram where one is appropriate. Depth rather than breadth; data interpreted. Assessment is implied rather than made.

    No mark is put on this attempt. The full answer above is marked 7–8 / 8 by its own commentary; what a truncated version scores depends on the script, and inventing a number for it would be the kind of false precision this page exists to avoid.

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