1.1-Circular flow of income Flashcards
What is the circular flow of income?
The circular flow of income is an economic model that illustrates how money moves through an economy between households and firms.
True or False: In the circular flow model, households provide factors of production to firms.
True
Fill in the blank: The two main sectors in the circular flow of income model are _____ and _____ sectors.
household, firm
What do households receive in exchange for providing factors of production?
Wages, rent, interest, and profit.
What is meant by ‘injections’ in the circular flow of income?
Injections are additions to the economy through investment, government spending, and exports.
What are ‘leakages’ in the context of the circular flow of income?
Leakages are withdrawals from the economy through savings, taxes, and imports.
How do injections affect the circular flow of income?
Injections increase the overall level of income and output in the economy.
How do leakages affect the circular flow of income?
Leakages decrease the overall level of income and output in the economy.
What is the role of the government in the circular flow of income?
The government influences the economy through taxation and public spending.
Multiple Choice: Which of the following is NOT a leakage? A) Savings B) Taxes C) Investment
C) Investment
Short Answer: Name one type of injection in the circular flow of income.
Investment
What is the relationship between injections and leakages for economic equilibrium?
For the economy to be in equilibrium, total injections must equal total leakages.
True or False: The circular flow of income can be used to analyze the impact of fiscal policy.
True
Fill in the blank: The circular flow of income assumes that all income is _____ and spent.
earned
What is the significance of the ‘national income’ in the circular flow of income?
National income represents the total income earned by factors of production in an economy.
Multiple Choice: Which of the following is a component of GDP? A) Consumption B) Savings C) Imports
A) Consumption
Short Answer: What does GDP stand for?
Gross Domestic Product
What does the term ‘factor markets’ refer to in the circular flow model?
Factor markets are where services of the factors of production are bought and sold.
True or False: In the circular flow model, firms are the only producers of goods and services.
True
Fill in the blank: Households use their income to purchase _____ from firms.
goods and services
What is the impact of increased consumer spending on the circular flow of income?
Increased consumer spending leads to higher demand for goods and services, stimulating production and income.
Multiple Choice: Which of the following is a leakage? A) Exports B) Taxes C) Government Spending
B) Taxes
Short Answer: What is the purpose of government spending in the circular flow of income?
To stimulate economic activity and provide public services.
What is the relationship between exports and the circular flow of income?
Exports are an injection that brings money into the economy from foreign buyers.
