Circular flow of Income

Question 1

What is Circular flow of Income

Answer 1

• The circular flow of income is a way of showing how income circulates in the economy

Question 1

Psychical flow of income

Answer 1

• The physical movements of goods and services

Question 2

Monetary flow of Income

Answer 2

• The movement of money payments from the household to the firms in exchange for final goods and services.
• and from the firms to the households sector in exchange for the services of resources

Question 3

Explain the circular flow of Income

Answer 3

The circular flow of income follows the money in an economy. In the pizza economy, firms produce pizzas and sell them to households, while households sell labor to firms and purchase pizzas from them.

e.g.You pay for pizza, the firms uses that capital to pay employees

Question 4

Criticisms of CFI - High Inflation

Answer 4

• The Government keeps markets stable (Through increased government spending) which results in increased consumer confidence
• People are more likely to spend which increases demand and decreases the supply, pushing prices up = high inflation
• Government spending = people who are on benefits, creating “artificial” demand, pushing prices up = high inflation

Question 5

Criticisms of CFI - Overreliance on government

Answer 5

Overreliance and overconfidence in the government’s ability to micromanage the economy exacerbated many economic problems faced in 1980’s Britain:

• High inflation (1979 – 1981, Recession - 20% inflation) – explained above
• High unemployment (3 Million in 1980) – needing to make cutbacks due to not being able to afford raw materials /capital (inflation)
• Government indebtedness – more money being injected through government spending than being collected through taxation.