Circular Flow of Income Flashcards
AD and AS
What is the circular flow model?
An economic model which illustrates how money moves from producers to consumers and back again in an endless loop.
What are the primary players of the circular flow model?
Household and Corporations.
What are leakages to the model?
Money which is removed - not moving between households and corporations.
What are some examples of leakages?
Savings
Taxation
Imports
What are injections into the model?
Money which is added - money which begin moving between households and corporations.
What are some examples of injections?
Investments from firms
FDI
Government spending
Exports
What does a larger quantity of leakages mean for the model?
Reduction to movement within the model.
What does a larger quantity of injections mean for the model?
Increases to movement within the model.
What does the circular flow of income tell us about the economy?
The more/faster money is being distributed around the cycle, the more economic growth and vice versa.
What are the four components of aggregate demand?
Consumption.
Investment.
Government Spending.
Exports/Imports.
What is consumption affected by?
Consumer confidence.
Wages.
Interest rates.
Personal taxation levels.
Levels on employment and unemployment.
What is investment affected by?
Capacity utilisation
Confidence
Interest Rates
Levels of Corporation tax.
What is government spending affected by?
Government priorities and macro-economic objectives.
Stage in the economic cycle.
What is exports/imports affected by?
Exchange rates.
International competitiveness.
State of the global economy.
What is aggregate demand?
Total demand in an economy.
What is aggregate supply?
Total output of an economy.
What will happen to AD during a recession?
AD will decrease (shift to the left).
What will a decrease in AD lead to?
Spare capacity in the economy so inflation is likely to be low.
What will happen to AD during an economic boom?
AD will increase (shift to the right).
What will an increase in AD lead to?
Pushes the economy towards full capacity, leading to accelarating inflation.
Why does consumers and firms having higher confidence cause economic growth?
They will invest and spend more, because they feel as though they get a higher return on them.
What is consumer and firm condifence affected by?
income and inflation.
Why does lower interest rates cause economc growth?
It will be cheaper to borrow and reduces the incentive to save, spending and investment will increase.
Why does lower taxes cause economic growth?
Consumers have more disposable income so AD rises and spending and investment will increase.
Why does depreciation in currency cause economic growth?
Imports will be more expensive, exports will be cheaper so AD will increase.
What is the wealth effect?
When a large amount of the population own houses, and house prices rise, people feel wealthier and are likely to spend more.
Why does more available credit cause economic growth?
Spending and investment may increase.
What are capital goods?
Productive assets, aquired by investment, which are expected to make a contribution to future output.
