Chapter 12: the circular flow of income

Question 1

Economic models

Answer 1

These are used to show characteristics of complicated economic conditions in order to analyse them and predict the result of changes of variables.

Question 2

Recession

Answer 2

When an economy is growing at less than its long-term trend rate of growth for two consecutive quarters.

Question 3

Balance of payments

Answer 3

exports minus imports - a deficit means more is imported than exported.

Question 4

Flow

Answer 4

Measured over a specific period of time

Question 5

Stock

Answer 5

A quantity measured at a particular point in time.

Question 6

Injections

Answer 6

Money that originates outside the circular flow and so will increase national income/ output/ expenditure.

Question 7

Withdrawals

Answer 7

Any money not passed on in the circular flow and has the effect of reducing national income/ output / expenditure.

Question 8

Investment

Answer 8

Spending by firms on buildings, machinery and improving the skills in the labour force.

Question 9

Savings

Answer 9

A withdrawal from the circular flow.

Question 10

Income induced

Answer 10

Will increase as income increases and decrease as income decreases.

Question 11

Multiplier effect

Answer 11

When an increase or decrease in spending leads to a larger than proportionate change in the national income.

Question 12

Net government spending

Answer 12

The difference between government spending and taxation.

Question 13

Fiscal policy

Answer 13

the policy of the government regarding taxation and government spending/ expenditure.

Question 14

Disposable income

Answer 14

Income available to households after the payment of income tax and national insurance contribution.