Circular Flow of Income

Question 1

What is macroeconomics?

Answer 1

study of the economy as a whole

studies the general price level of the economy, total demand for goods and services, total output, total employment, total investment, total exports and imports

total = aggregate

Question 2

What are the macroeconomic objectives?

Answer 2

full employment

a stable / gentle rising price level

economic growth

equitable distribution of income

external balance

Question 3

Who are the players and what markets are involved in the simple closed flow of income model?

Answer 3

households (consumers)
firms (businesses)

resource market
product market

Question 4

Draw the simple closed flow of income model

Answer 4

YYYYYEESS HHHHAAANNNNNNAAHHH!!!

firms, cost of production, household income, households, household expenditure, product market, revenues

firms, goods and services, product market, G&S, households, factors of production, resource market, factors of production

Question 5

What is flowing in the model?

Answer 5

resources from households to firms turned into G&S, then flowed back to households

money flowed in opposite direction - firms to households then households to firms

Question 6

What are the injections and leakages?

Answer 6

Injections -
investments
gov. spending
exports

Leakages -
savings
taxes
imports

Question 7

Draw the circular flow of income model wt leakages and injections

Answer 7

Players:
households (C)
firms (F)
financial markets (M)
gov. (G)
other countries (X)

F to H - factor incomes
H to F - consumer expenditure
H to M - saving
H to G - taxes
H to X - spending on imports
M to F - investments
G to F - gov. spending
X to F - spending on exports

Question 8

What does it mean if leakages are greater than injections?

Answer 8

size of circular flow becomes SMALLER

(A.K.A fewer G&S purchased, less output, fewer factors of production, increased unemployment, decreased household income)

Question 9

What does it mean if injections are larger than leakages?

Answer 9

size of circular flow of income becomes LARGER

(A.K.A foreigners demand for G&S increases, increase factors of production, decrease unemployment, household income increases)