1.1 Circular Flow of Income

Question 1

What is the circular flow of income model?

Leakage: money flowing out
Injection: money coming in

Injections and leakages?

Answer 1

A model of the economy that shows the movement of gods and services between househoolds and firms and their corresponding payments in money terms, together with the supply of factors of production.
Describes the total flow of income, output and expenditure in an economy.

I: Exports, investment, gov spending.
L: Savings, taxes, impots

Question 2

APC, APS

Average propensity to consume, save

Answer 2

• APC- Proportion of income that households devote to consumer expenditure.
• APS- Proportion of income that households devote to saving.
  Income/Spending or Income/Saving

Question 3

MPC, MPS, MPW

Answer 3

• MPC- Proportion of additional income that households devote to expenditure (An additional income of £100 leads to £40 extra spending so MPS is 0.4).
• MPS-Proportion of additional income households save.
• MPW- How much of any addition to the circular flow wil be withdrawn (MPW=MPS+MPM+MPT)