Circular Flow of Income Flashcards

AD and AS

1
Q

What is the circular flow model?

A

An economic model which illustrates how money moves from producers to consumers and back again in an endless loop.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the primary players of the circular flow model?

A

Household and Corporations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are leakages to the model?

A

Money which is removed - not moving between households and corporations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are some examples of leakages?

A

Savings
Taxation
Imports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are injections into the model?

A

Money which is added - money which begin moving between households and corporations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are some examples of injections?

A

Investments from firms
FDI
Government spending
Exports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What does a larger quantity of leakages mean for the model?

A

Reduction to movement within the model.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What does a larger quantity of injections mean for the model?

A

Increases to movement within the model.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What does the circular flow of income tell us about the economy?

A

The more/faster money is being distributed around the cycle, the more economic growth and vice versa.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the four components of aggregate demand?

A

Consumption.
Investment.
Government Spending.
Exports/Imports.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is consumption affected by?

A

Consumer confidence.
Wages.
Interest rates.
Personal taxation levels.
Levels on employment and unemployment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is investment affected by?

A

Capacity utilisation
Confidence
Interest Rates
Levels of Corporation tax.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is government spending affected by?

A

Government priorities and macro-economic objectives.
Stage in the economic cycle.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is exports/imports affected by?

A

Exchange rates.
International competitiveness.
State of the global economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is aggregate demand?

A

Total demand in an economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is aggregate supply?

A

Total output of an economy.

17
Q

What will happen to AD during a recession?

A

AD will decrease (shift to the left).

18
Q

What will a decrease in AD lead to?

A

Spare capacity in the economy so inflation is likely to be low.

19
Q

What will happen to AD during an economic boom?

A

AD will increase (shift to the right).

20
Q

What will an increase in AD lead to?

A

Pushes the economy towards full capacity, leading to accelarating inflation.

21
Q

Why does consumers and firms having higher confidence cause economic growth?

A

They will invest and spend more, because they feel as though they get a higher return on them.

22
Q

What is consumer and firm condifence affected by?

A

income and inflation.

23
Q

Why does lower interest rates cause economc growth?

A

It will be cheaper to borrow and reduces the incentive to save, spending and investment will increase.

24
Q

Why does lower taxes cause economic growth?

A

Consumers have more disposable income so AD rises and spending and investment will increase.

25
Q

Why does depreciation in currency cause economic growth?

A

Imports will be more expensive, exports will be cheaper so AD will increase.

26
Q

What is the wealth effect?

A

When a large amount of the population own houses, and house prices rise, people feel wealthier and are likely to spend more.

27
Q

Why does more available credit cause economic growth?

A

Spending and investment may increase.

28
Q

What are capital goods?

A

Productive assets, aquired by investment, which are expected to make a contribution to future output.

29
Q
A