Chp. 2: Economic Flows

Question 1

Draw the circular flow, including the 5 sectors and the 8 money flows

Answer 1

Household, business, financial, government and foreign

Y = C+S+I+T+G+M+X

Question 2

When looking at a graph, what are some key points to discuss?

Answer 2

• How long the graph spans
• Average points (eg. 4% growth over the last 20 years)
• Discuss why there are dips or booms
• Possibly compare to other graphs

Question 3

How will the economy be affected if there are more leakages rather than injections?

Answer 3

The economy will most likely contract if there are more leakages as there is less money going IN to the economy (aggregate demand)

Question 4

What is an open economy?

Answer 4

An economy with five sectors; contains a foreign sector

Question 5

What economic objectives would a government typically have?

Answer 5

• stability of prices
• low um-employment
• economic growth
• stability in international transactions

Question 6

What’s the difference between aggregate demand and supply?

Answer 6

AD = total expenditure on the goods and services produced in an economy (injections)
AS = total value of goods and services available for sale in an economy

Question 7

What factors affect consumer spending and investment?

Answer 7

spending - level of disposable income, interest rates, government policies
investment - business needs confidence, interest rates, potential/perceived profitability

Question 8

What effects government spending?

Answer 8

economic conditions - eg./ if there is unemployment there will need more funding for those benefits, same with say a natural disaster

Question 9

Define or outline the fiscal policy

Answer 9

implemented through the Australian governments annual budgets by controlling and manipulating the level of aggregate demand

Question 10

Define; T=G, T>G, T

Answer 10

All definitions of the economic budget
T=G is a balanced budget
T>G is a surplus budget
T

Question 11

Define or outline the monetary policy

Answer 11

implemented through the RBA, influences money supply and interest rates

Question 12

What occurs within the economy when interest rates are high?

Answer 12

low money supply, income and economy

appropriate for an upswing/boom

Question 13

How can the government boost aggregate supply

Answer 13

implement infrastructure, technology, immigration, workforce and tax concessions

Question 14

Why might a boom be undesirable?

Answer 14

• high prices
• reduced competition
• high interest rates
• people can’t afford it

Question 15

Why might governments struggle to eliminate these swings in the trade cycle?

Answer 15

• can’t control global or climate conditions

- may over or under-spend in the economy

Question 16

List seven things that effect the circular flow of income?

Answer 16

1. Interest Rates
2. Productivity
3. Consumer/Business confidence
4. Government policies
5. Exchange rates
6. Trading partners
7. Household disposable income

Question 17

How might an economy recover from a trough in the trade cycle?

Answer 17

Eventually, things will need to be replaced such as capital goods, therefore people would need to buy new things. This would increase spending and production.