Circular flow

Question 1

What is the relationship between households and firms?

Answer 1

Households provide resources to firms such as labour. In return for their resources, households get the finished good or service.

Question 2

FINANCIAL SECTOR

Answer 2

Includes banks and other financial institutions.

Question 3

Money taken out and returned into the circular flow is?

Answer 3

Money taken out is a WITHDRAWAL, and money returned is an injection.
Eg.

• Savings by households is a wihdrawal. Any increase in households savings is a decrease in consumer spending.
• investment by firms is classified as an injection as money is borrowed and spent on capital goods. Therefore returning money to the circular flow.

Question 4

Explain the impact on circular flow if consumers can’t spend that much

Answer 4

Less consumer spending means that less money is injected into the circular flow. This decreases A/D. (Aggregate demand).

Question 5

GOVERNMENT SECTOR

Answer 5

Government spends money on education, law n order, healthcare, buildings etc.
also provided is welfare to those who cannot provide for themselves. The benefit is one form. This ensure they are still able to be apart of the economic system.

Question 6

Taxation

Answer 6

Households and firms both pay taxes to finance government spending. Taxes are compulsory and are a withdrawal from the circular flow.

Question 7

Direct taxes/Indirect taxes

Answer 7

Direct taxes are paid straight to in,and revenue in the form of income tax.

Indirect tax is a tax that is added onto the price of goods and services in the form of gst.

Question 8

How does increased in taxation affect the level of consumer spending and the circular flow.

Answer 8

Increased tax decreases consumer spending, which therefore decreases A/D. Shifts the ad curve to the left.

Question 9

OVERSEAS SECTOR

Answer 9

Economies in the rest of the world, including trade partners of New Zealand such as, UK China and Australia.

Question 10

Imports

Answer 10

Imports are goods or service purchased from over seas markets, e.g cars from Japan etc.
this is called import payments
It is a WITHDRAWAL from the circular flow.

Question 11

Exports

Answer 11

Exports are goods and services sold from our country to other countries eg. Dairy products, kiwi fruit etc.
This is called export receipts
This is an injection into the circular flow.

Question 12

What is BOP?

Answer 12

BOP ( Balance of Payments) 
Measures the the flow of money in between Nz and the rest of the world. 
BOP is exports minus imports. 
If exports>imports it is a SURPLUS
If imports< exports it is a DEFICIT