Circular Flow Flashcards
What goes from households to firms in the circular flow model?
Factors of Production, Expenditure
What goes from firms to households in the circular flow?
Wages etc, G+S
What do households own in the circular flow model?
All wealth and resources
What happens to national income if leakages > injections?
The national income will be shrinking
What happens if injections = withdrawals?
Income remains the same
What happens to national income if injections > withdrawalls?
National income grows
What is wealth in an economy?
Stock of assets with an economy e.g. stock of property, capital etc
How is wealth and income correlated in an economy?
A high stock of wealth leads to a higher national income
What are the injections?
Investment, Exports, Government spending
What are the withdrawals?
Saving, imports, taxes
Equations for the multiplier (3)
1/(1-MPC) = 1/(MPW) = 1/(MPT + MPM + MPS)
The multiplier can also be expressed as a ratio which is?
Final change in income : Initial change in injection
What is Marginal Propensity to Consume
Marginal propensity to consume =change in consumption/change in income= dC/dY
What is MPS
change in savings/change in income
dS/dY
What is the Circular Flow equation
(X=Y=Z) what is X, Y & Z
O=E=Y (Output=Expenditure=Income)
Name the injections
Investment, Government spending & Exports
Name the withdrawals
saving, taxing & imports
What goes from firms to households in the circular flow diagram
Goods and services (Innerconsumption Cycle)
Income e.g. Wages/rents/interest/profit (Outer income Cycle)
What goes from households to firms in circular flow
Expenditure on G+S (Outer Cycle)
Land, labour, capital (Inner Cycle)
When is an economy in equilibrium
injections=withdrawals
What is the negative multiplier affect?
Discarding any injections or withdrawals, what is the relationship between output, expenditure, income?
National Output = National Expenditure = National Income
When would the multiplier affect have less impact on economic growth?
When an economy is close to its potential output, so any growth in AD leads to inflation (Keynesian only)
