circular flow of income (slides one)

Question 1

What are the 5 different sectors of an economy?

Answer 1

• consumers
• businesses
• financial institutions
• the government
• the overseas sector

Question 2

what does the Circular flow of income show about money and the economy

Answer 2

WHERE it is being injected INTO the economy, and where it is being leaked FROM the economy.

Question 3

What does the 2 sector model encompass?

Answer 3

• household sector (consumers) and firms sector (businesses)
• households buy goods + services from firms → consumption
• firms employ households to produce their goods + services → paying income

Question 4

Why are consumers and businesses interdependent?

Answer 4

• businesses don’t survive without consumers buying their goods + services
• consumers rely on businesses to provide them with the goods + services they demand
  
  • and provide with income

Question 5

What is the finance sector’s job?

Answer 5

being intermediaries between savers and borrowers.

Question 6

what is an intermediary?

Answer 6

A person who acts as a LINK between people in order to bring out an agreement (like a mediator)

Question 7

In the finance sectors, who are the intermediaries?

Answer 7

Banks

Question 8

What does the finance sector do?

Answer 8

• keep savings of individuals + businesses
• lend money to others who need to borrow

Question 9

Is saving an injection or leakage?

Answer 9

Leakage

Question 10

Is investment an injection or leakage?

Answer 10

Injection

Question 11

What options does finance add to the 2 model sector?

Answer 11

• consumers can choose to SAVE their money instead of spending on firms - leakage
• firms can choose to INVEST and borrow money to expand and grow their businesses - injection

Question 12

What is the government’s 2 main roles?

Answer 12

• taxation (leakage) - gov. collects taxes from individuals + businesses when they earn an income or profit
• government expenditure (injection) - gov. spend money raised through taxation on things such as infrastructure, welfare payments, education, + health

Question 13

What impact does the overseas sector have on the CFOI?

Answer 13

• EXPORTS (injections) - AUS businesses selling their g + s to overseas individuals, businesses, or governments.
• IMPORTS (leakages) - buying overseas g + s by AUS.

Question 14

How do you figure out if the economy is growing or shrinking?

Answer 14

By adding up the injections and adding up the leakages, and comparing them to each other.

Question 15

if INJECTIONS > LEAKAGES…

Answer 15

Economic growth occurs and the economy expands.

Question 16

if LEAKAGES > INJECTIONS…

Answer 16

Economic decline occurs and the economy shrinks.

Question 17

What is the governments role with economic activity?

Answer 17

To manage and maintain balance within the economy by altering the flows of money and influencing decision within sectors.