Circular flow of income

Question 1

Define households in the circular flow of income

Answer 1

Households- own all factors of production (CELL)- receive income in payment for CELL e.g. rent

Question 2

Define firms in the circular flow of income

Answer 2

Firms- producing units- receive income when households buy 🚘/🧹

Question 3

What is he relation between income and output in the circular flow of income?

Answer 3

Income & output are the same as ⬆️ in household income = ⬆️ firm output

Question 4

What is wealth?

Answer 4

Wealth- stock concept- sum of all assets in economy e.g. 🏠, shares etc- has indirect impact of circular flow of income (wealth effect)

Question 5

What is income?

Answer 5

Income- flow concept- has direct impact on circular flow of income

Question 6

What is the wealth effect?

Answer 6

Wealth effect- effect on income or spending when the value of a asset changes e.g. if a 🏠 appreciates then owner feels ⬆️ rich 💰 & … spends ⬆️ … contributing to circular flow

Question 7

What are injections in the circular flow of income?

Answer 7

Injections- flows into circular flow of income

Question 8

What are withdrawals in the circular flow of income?

Answer 8

Withdrawals (leakages)- flows out of circular flow of income

Question 9

What are the injections of the circular flow of income?

Answer 9

1) Investment
2) Government spending
3) Exports

Question 10

What are the withdrawals of the circular flow of income?

Answer 10

1) Savings
2) Tax- people spending power ⬇️- government takes 💵 & ✖️ spend it
3) Imports

Question 11

What does the size of injections and withdrawals relative to one another signify?

Answer 11

• If injections > withdrawals- economy grows ⬆️
• If withdrawals > injection- economy contracts ⬇️
• If injections = withdrawals- economy in equilibrium

Question 12

What is the multiplier ratio?

Answer 12

Multiplier ratio- ratio of change in the real income (real GDP- X-axis) to change in injection that caused the change in real incomes

Question 13

What is multiplier caused by?

Answer 13

Multiplier caused by injection 💵 being re-spent (again & again)

Question 14

What is MPC, MPW, MPS, MPT and MPM?

Answer 14

• MPC- marginal propensity to consume
• MPW- marginal propensity to withdraw
• MPS- marginal propensity to save
• MPT- marginal propensity to tax
• MPM- marginal propensity to import

Question 15

How do you calculate the multiplier?

Answer 15

Multiplier = 1/MPW = 1/ (MPS + MPT + MPM) = 1/ (1-MPC)

Question 16

What is the relationship between the multiplier and the MPW?

Answer 16

Multiplier inversely proportional to MPW … the ⬆️ the leakages, the ⬇️ the multiplier

Question 17

What is the relationship between the multiplier and the shift in AD?

Answer 17

The ⬆️ the multiplier, the ⬆️ the shift in AD