Circular Flow

Question 1

What goes from households to firms in the circular flow model?

Answer 1

Factors of Production, Expenditure

Question 2

What goes from firms to households in the circular flow?

Answer 2

Wages etc, G+S

Question 3

What do households own in the circular flow model?

Answer 3

All wealth and resources

Question 4

What happens to national income if leakages > injections?

Answer 4

The national income will be shrinking

Question 5

What happens if injections = withdrawals?

Answer 5

Income remains the same

Question 6

What happens to national income if injections > withdrawalls?

Answer 6

National income grows

Question 7

What is wealth in an economy?

Answer 7

Stock of assets with an economy e.g. stock of property, capital etc

Question 8

How is wealth and income correlated in an economy?

Answer 8

A high stock of wealth leads to a higher national income

Question 9

What are the injections?

Answer 9

Investment, Exports, Government spending

Question 10

What are the withdrawals?

Answer 10

Saving, imports, taxes

Question 11

Equations for the multiplier (3)

Answer 11

1/(1-MPC) = 1/(MPW) = 1/(MPT + MPM + MPS)

Question 12

The multiplier can also be expressed as a ratio which is?

Answer 12

Final change in income : Initial change in injection

Question 13

What is Marginal Propensity to Consume

Answer 13

Marginal propensity to consume =change in consumption/change in income= dC/dY

Question 14

What is MPS

Answer 14

change in savings/change in income

dS/dY

Question 15

What is the Circular Flow equation

(X=Y=Z) what is X, Y & Z

Answer 15

O=E=Y (Output=Expenditure=Income)

Question 16

Name the injections

Answer 16

Investment, Government spending & Exports

Question 17

Name the withdrawals

Answer 17

saving, taxing & imports

Question 18

What goes from firms to households in the circular flow diagram

Answer 18

Goods and services (Innerconsumption Cycle)

Income e.g. Wages/rents/interest/profit (Outer income Cycle)

Question 19

What goes from households to firms in circular flow

Answer 19

Expenditure on G+S (Outer Cycle)

Land, labour, capital (Inner Cycle)

Question 20

When is an economy in equilibrium

Answer 20

injections=withdrawals

Question 21

What is the negative multiplier affect?

Question 22

Discarding any injections or withdrawals, what is the relationship between output, expenditure, income?

Answer 22

National Output = National Expenditure = National Income

Question 23

When would the multiplier affect have less impact on economic growth?

Answer 23

When an economy is close to its potential output, so any growth in AD leads to inflation (Keynesian only)