Circular Flow of Income

Question 1

Micro vs. Macroeconomics

Answer 1

Micro = decisions at the company level based on the type of organisation and their market

Macro = considers the impact of gov decisions on the economy

Question 2

Macroeconomics

Answer 2

Made up of production, consumption and income (aka money supply)

Question 3

Circular Flow of Money

Answer 3

Households provide businesses with labour, businesses provide households with goods and services

Businesses give households income for their labour, households use income to buy businesses’ goods/services

Question 4

Withdrawals/Injections

Answer 4

Withdrawals are money taken out of the circular flow: savings, taxes, imports

Injections are money entering the circular flow: borrowing, gov spending, exports

Higher injections grows an economy, the reverse slows growth/reduces

Question 5

Imports/Exports

Answer 5

Imports are goods bought from another country, money goes somewhere else

Exports are local goods sent abroad, money comes in from somewhere else

Question 6

Savings & Investments

Answer 6

Savings: any amount of income not spent, a withdrawal from the circular flow.

Investments: purchase of an item in hope it will generate income or accrue value, injection into the circular flow

Question 7

Factors Affecting Savings

Answer 7

Interest rate: higher rate = more saving
Income: higher earners can save more
Job security: low security = more saving
Credit availability: more = less saving
Contractual saving i.e. pensions
Tax relief: more relief = more saving
Inflation: higher inflation = less saving

Question 8

Factors Affecting Investments

Answer 8

New or replacement
Expected future returns
Business confidence
Interest rates
Gov policy

Question 9

National Income

Answer 9

Total amount of goods and services produced over the course of a year, which is equal to the total amount earned by all people and businesses

Question 10

Interest Rates

Answer 10

Increased interest rates:
Decreased investment, attraction of foreign funds, increased exchange rate, decreased inflation, decrease in asset values, affect on sales
Decreased rates result in the reverse

Question 11

Balance of Payments

Answer 11

Value of imports and exports and the difference between them. Made up of:

Current account - visible & invisible trade

Capital account - fixed assets

Financial account - investments, reserve assets (gold, currency) & balancing item (amount to make sure value of all 3 combined is 0)

Question 12

Import/Export Performance

Answer 12

Both are affected by:
Exchange rates
More competitive on price
More competitive on non-price factors
Foreign/domestic producers willing and able to export goods

Question 13

How does a Gov Manage BoP

Answer 13

Do nothing

Actively affect FX rates - by buying and selling currencies to make rates favourable

Trade barriers - quotas and tariffs

Question 14

Monetary Policy

Answer 14

Gov management of the economy through:

• changing interest rates
• making borrowing easier/harder
• buying and selling foreign currency
• imposing or removing quotas & tariffs

Question 15

Money Supply & Interest Rates

Answer 15

If there’s low money supply, interest rates can go up

High money supply sees rates go down

Question 16

Consumption

Answer 16

The amount of goods and services demanded in an economy. The measure of consumption if marginal propensity to consume

Question 17

Marginal Propensity to Consume

Answer 17

Change in income

Question 18

Factors Affecting Consumption

Answer 18

Previous income
Future income
Windfall gains or losses
Gov policy
Wealth