1.1 B - Circular flow of income

Question 1

What is the circular flow of income diagram?

Answer 1

on the outside
consumers –> buy goods and services –> producers
producers –> pay rewards to owners of factors of production–> consumer

On the inside
consumers –> provide factors of production –> producers
producers –> make goods and services –> consumers

Question 2

Multiplier effect definition

Answer 2

A process by which every expenditure generates a tail of subsequent expenditure so that the resultant change will exceed the amount initially expected

Question 3

What are the two types of economies?

Answer 3

• Closed economy
• Open economy

Question 4

What is a closed economy

Answer 4

No interaction with foreign economic agents and economies

Question 5

How does income work in a closed economy

Answer 5

Income circulates within the domestic economy
Dometic production == Dometic consumption

Question 6

What is an open economy

Answer 6

Interactions between a domestic economy and the global economy

Question 7

How does income work in an open economy

Answer 7

Income can be both injected and leaked out of a domestic economy over time

-need diagram

Question 8

leakages

Answer 8

Describes the negative flows of income out of the circular flow of income

Question 9

Injections

Answer 9

Positive flows into the circular flow of income

Question 10

What are the leakages in economies around the world

Answer 10

• Taxes
• Savings
• Imports
  These all == MONEY OUT

Question 11

How is taxes an example of a leakage

Answer 11

Income tax is a level of income that individuals have rightly earnt from their labour that they cannot spend - therefore it’s a leakage because it cannot be spent on domestic G&S that are produced.

Question 12

How is savings an example of a leakage

Answer 12

Consumers have a choice to spend or save, by saving means that G&S aren’t being consumed and the money is not circulated within the flow of income.

domestic consumption is sacrificed today in order to increase consumption in the future

Question 13

How is imports an example of a leakage

Answer 13

Spending on foreign g&s means the money is going out of the domestic economies.

Question 14

What are examples of injections

Answer 14

• Government spending
• Investments
• Exports
• MONEY IN

Question 15

How is government spending an example of an injection

Answer 15

Government spending to improve infrastructure or to better quality of education, they have to inject money into firms - domestic producers.

Question 16

How is investments an example of an injection

Answer 16

Business investment - increase the amount of capital they have or better technology, they have to invest back into the economy.

Question 17

How are exports an example of an injection

Answer 17

Exports are selling domestically produced g&s to foreign consumers, so money back into the flow of income from foreign economies.

Question 18

How does leakages and injections effect the overall circular flow of income

Answer 18

There won’t be a consistent level of income circulating in the open economy (high and low levels of income)

closed economy - consistent level of income

Question 19

What are the trade flows that exist within an open economy

Answer 19

Domestic consumers buying goods and services from other countries
-> MONEY OUT
-> that leads to the countries use our money to buy our g&s (long-term)
–> MONEY BACK IN

long term view of this, these flows of income will balance out

Question 20

What are the mutual benefits of trade flows in an open economy

Answer 20

ALL INCREASE:
-production
-specialisation
-access to capital
-economies of scale
-competition

Question 21

What are the government flows (spending and taxation) within the circulatory flow of income

Answer 21

Taxes imposed by the government
-> MONEY OUT
–> use tax revenue to increase spending or make investments
—> MONEY BACK IN

in the long term this could lead to a far greater increase in income than what was taken out due to the multiplier effect being active

Question 22

Finance sector (savings and investment) work as a pair - circulatory flow of income

Answer 22

Savings made by consumers
-> MONEY OUT
–>Savings provide funds for domestic investments (loans and borrowing)
—> MONEY BACK IN

Question 23

Savings definition within the cirulatory flow of income

Answer 23

consumers save instead of spending leading to domestic consumption being sacrificed today in order to increase consumption in the future.

Question 24

How is economic growth effected by injections and leakages

Answer 24

Injections > Leakages —> economic growth increases

Injections < Leakages —> economic growth decreases

Injections = Leakages —> economic growth stays the same