Circular Flows

Question 1

What is the circular flows model?

Answer 1

A model that tries to explain how the economy works ad how changes in AD happens

Question 2

Define circular flows

Answer 2

The movement of spending, output and income throughout the economy

Question 3

What are injections? (circular flows model)

Answer 3

Additions of extra spending into the circular flow of income - increasing AD

Question 4

What are leakages? (circular flows model)

Answer 4

Withdrawals of possible spending from the circular flows of income - decreasing AD

Question 5

What happens when injections = leakages?

Answer 5

Macroeconomic equilibrium

Question 6

What is the multiplier effect?

Answer 6

The process by which any change in a component of AD results in a greater final change in GDP

Question 7

What components are part of the circular flow model?

Answer 7

Households
Financial Market
Firms

Question 8

Describe and explain the circular flows model

Answer 8

Households spend money, which goes into the financial market
The financial market spend money with firms (businesses) who invest money back into their companies
Consumers buy from firms