8.1 Economic activity

Question 1

What does the circular flow of income model show

Answer 1

Shows that the value of the output produced by an economy is equal to the total income generated from producing the output, which is equal to the total expenditure made to purchase the product.

Question 2

What happens when w>j

Answer 2

The circular flow of income model becomes smaller. When savings / taxes / imports spending is more than investment / government spending / export spending, less goods and services are purchased, firms will cut back on their output –> less FOP needed, household income decreases, unemployment increases.

Question 3

What happens when j>w

Answer 3

The circular flow of income model will become larger. When the investments / government spending / exports spending is more than savings / taxes / imports spending, less goods and services will be purchased. This causes firms to increase their output –> more FOP needed, household income increases and unemployment decreases