Circular Flow of Income Real

Question 1

What percentage of GDP does consumption typically comprise?

Answer 1

Around 55%.

Question 2

How much of the final value is counted in GDP

Answer 2

For example a farmer grows wheat and sells it to a flour mill for $10,000. The mill produces flour and sells it to the grocery chain for $20,000. The supermarket sells the flour to consumers for $30,000.Only the final value of $30,000 is counted in GDP.

Question 3

What is consumption expenditure?

Answer 3

he market value of all goods and services purchased by households, including both durable and non-durable goods.

Question 4

What are the components of the expenditure method of measuring GDP?

Answer 4

GDP = C + I + G + (X - M)

Question 5

What are the determinants of aggregate consumption?

Answer 5

a) Disposable income b) Household wealth c) Consumer expectations d) Government policies

Question 5

Why is consumption spending relatively stable over time?

Answer 5

arge proportion of consumption is on essential goods and services such as food, rent, and healthcare.

Question 6

What does investment expenditure refer to?

Answer 6

Investment expenditure refers to purchases of capital goods such as machinery, equipment, and new construction.

Question 6

What are the three main categories of investment?

Answer 6

1. Business investment 2. Residential investment 3. Inventories

Question 7

What are the determinants of aggregate investment?

Answer 7

a) Rate of interest b) Real rate of interest c) Business expectations d) Government policies

Question 8

What types of government spending are not counted in GDP and why?

Answer 8

Transfer payments, such as unemployment benefits and pensions, are not counted in GDP because no new good or service is created.

Question 9

What is included in aggregate government expenditure?

Answer 9

Expenditure on government programs in health, education, social welfare, and defense.

Question 10

What are the two main categories of government expenditure?

Answer 10

1. Current expenditure 2. Capital expenditure

Question 11

What are the determinants of aggregate government expenditure?

Answer 11

The state of the economy (economic fluctuations).

Question 12

How are net exports defined in the context of GDP?

Answer 12

Net exports are the difference between the value of exports (money flowing into the economy) and imports (money flowing out of the economy).

Question 13

What are the determinants of net exports?

Answer 13

Exchange rate and terms of trade.

Question 14

What are the key indicators of economic performance?

Answer 14

1. Gross Domestic Product (GDP) 2. Unemployment rate 3. Inflation rate

Question 15

What is aggregate expenditure (AE) and how is it calculated?

Answer 15

Aggregate expenditure is the total spending on final goods and services produced by the economy, calculated as AE = C + I + G + (X - M).

Question 16

What is the government’s target rate for economic growth, unemployment, and inflation?

Answer 16

GDP growth at 3-4%, unemployment at 5-6%, and inflation at 2-3%.

Question 17

What is inflation?

Answer 17

nflation is a sustained increase in the general price level of goods and services over a period of time, reducing the purchasing power of money.

Question 18

What causes demand-pull inflation?

Answer 18

Demand-pull inflation occurs due to increased consumer, business, government, and foreign spending.

Question 19

What is cost-push inflation?

Answer 19

Cost-push inflation is the rise in prices of goods due to increased production costs, which companies pass on to consumers.

Question 20

What are examples of factors that contribute to cost-push inflation?

Answer 20

Increases in the cost of raw materials, electricity, labor, and oil.

Question 21

How did the Russia-Ukraine war affect global inflation?

Answer 21

It created supply shocks by increasing prices for key resources like crude oil and gas, leading to higher prices for many goods and services.

Question 22

What recent example of cost-push inflation occurred in Australia?

Answer 22

The increase in lettuce prices due to floods, which led to substitutions in food products like KFC’s use of cabbage instead of lettuce.

Question 23

What is the business cycle?

Answer 23

The business cycle is a model that describes short-term fluctuations in economic activity, showing increases and decreases in GDP over time.

Question 24

What can cause economic growth to increase?

Answer 24

Economic growth can increase due to consumer spending, government actions, and measures such as Job Keeper, infrastructure projects, decreasing interest rates, and buying bonds.

Question 25

What are the four phases of the business cycle?

Answer 25

he four phases are:

Peak (Boom)
Recession (Contraction)
Trough
Expansion (Upswing)

Question 26

What can cause economic growth to decrease?

Answer 26

Economic growth can decrease due to natural disasters, spread of diseases like COVID, and droughts that destroy crops.

Question 27

What characterizes the Peak/Boom phase?

Answer 27

High levels of consumption
Low levels of unemployment
High tax revenue for the government
Less government spending
High inflation rates

Question 27

charactersitcs of contraction phase

Answer 27

Business investment decreases
Unemployment increases
Consumption falls

Question 28

What happens during the recession/contraction phase?

Answer 28

During a recession/contraction phase:

Consumption and investment slow down
GDP growth slows
A recession is defined as two successive quarters of falling GDP
Extended recessions are called depressions

Question 29

What characterizes the trough phase?

Answer 29

Low levels of consumption
High unemployment levels
Low tax revenue for governments
Increased government spending to stimulate economic growth (e.g., welfare services)
Low inflation rates

Question 30

What happens during the expansion/upswing phase?

Answer 30

Economic activity increases
Characteristics:
Consumption starts to rise
Unemployment levels drop
Government spending slows
Tax revenue increases