Intro

Question 1

What does the circular flow of income and spending represent?

Answer 1

It shows how the key actors of the economy interact with each other, and how money is transferred between each of them

Question 2

In the circular flow model what are the two main actors of the economy?

Answer 2

Firms and households

Question 3

What do households provide to firms?

Answer 3

Labour

Question 4

Why do firms need labour of households?

Answer 4

To produce goods for the households

Question 5

What is an easier way to look at labour and goods in the circular flow of income and spending model?

Answer 5

Income from firms to households and then spending from households to firms

Question 6

What 3 leakages would you expect in the circular flow of income and spending model?

Answer 6

1. ) They save some of their income
2. ) Taxes
3. ) People buy foreign goods

Question 7

What is another way to say people buy foreign goods?

Answer 7

Imports

Question 8

What 3 injections would you expect in the circular flow of income and spending model?

Answer 8

1. ) Investment
2. ) Government spending
3. ) Foreigns buy our own goods

Question 9

What is another way to say foreigners buy our own goods?

Answer 9

Exports

Question 10

Draw a circular flow of money and income model.

Answer 10

Picture

Question 11

What is the equation for disposable income D?

Answer 11

Disposable income = total income - taxes

D = Y - T

Question 12

What is the circular flow identity?

Answer 12

(T-G) + (S-I) + (IM-EX) = 0

Question 13

What is another way of writing IM - EX

Answer 13

NX - net exports

Question 14

What is the aggregate expenditure identity?

Answer 14

Y = C -IM + EX + I + G

Question 15

If foreigners decide to not buy out goods and exports don’t happen how does the aggregate expenditure identity still hold?

Answer 15

The extra stock is called an unplanned investment and so will go under that section

Question 16

What is the equation for consumption C?

Answer 16

C =Y - T - S