Circular Flow Of Income

Question 0

What is the balance of payments?

Answer 0

Exports minus imports.
Deficits= M>X (such as UK)
Surplus= X>M

Question 1

What are the stages of the circular flow of income?

Answer 1

1. Recession to slump

2. Recovery to boom

Question 2

How does the circular flow of income work?

Answer 2

Households:
• Hire of factors (CELL) 
• Consumption of goods/services 
Firms:                  
• Payment for factors (CELL) rent, wage, interest, profit 
• Payment for g+s

Question 3

What are injections and withdrawals/leakages?

Answer 3

Injections= money that originates outside the circular flow and so will increase national output 
Firms= investment 

Withdrawals= any money not passed on in circular flow, thus reduces National output 
House+Firms= saving

Question 4

What is net government spending?

Answer 4

The difference between government spending and taxation.

Question 5

How does a 4 sector reach equilibrium?

Answer 5

• sum of injections=sum of leakages
• AD=income (when AD= C+I+G+(X-M)
• sum of injections>sum of leakages= national income rising
• sum of injections<sum of leakages= national income falling

Question 6

What are the 4 factors which can cause change in consumption?

Answer 6

W= wealth effect: consumers will change their level of consumption if see a chance in level of wealth

I= inflation: expectation of higher prices will cause consumption to rise

R= rate of interest: effect borrowing (higher when lower) and saving (higher when higher)

E= expectations: positive outlook on future will increase consumption e.g likelihood of a promotion

Question 7

What is a full four sector economy flow of income?

Answer 7

HOUSEHOLDS
Injections=
•Government expenditure 
•Exports 
Withdrawals/leakages=
•saving
•taxes
•imports 

FIRMS
Injections=
•investment 
•gov expenditure 
•exports 
Leakages=
•saving
•taxes 
•imports