Lecture 7 - Circular flow of income

Question 1

What is aggregate demand?

Answer 1

The total spending on goods and services made in the economy

Question 2

What are the four elements of aggregate demand?

Answer 2

• Consumer spending (c)
• Investment (I)
• Government spending (G)
• Expenditure on exports (X)

Question 3

How do you calculate Aggregate demand ?

Answer 3

• All the elements of aggregate demand minus imports

Question 4

What are factor payments in the circular flow?

Answer 4

• Firms pay money to households through wages, dividends, shares etc in return for the services of production egg land, labour etc

Question 5

What are withdrawals?

Answer 5

• Not all of the income received by households will be spent on goods and services e,g
  1) Net savings
  2) Net taxes
  3) Import expenditure

Question 6

How do you calculate withdrawals?

Answer 6

Net saving + net taxes + import expenditure

Question 7

What are injections?

Answer 7

• Not all demand for firms output comes from consumer expenditure

Question 8

What are the three types of injections and how is it calculated?

Answer 8

1) Investment on domestically produced goods
2) Government expenditure
3) Export expenditure
= All these added together

Question 9

What happens if injections exceed withdrawals?

Answer 9

• There will be a rise in aggregate demand that will cause economic growth, fall in unemployment and inflation to rise