Lesson 4 - Circular Flow of Income

Question 1

What does the circular flow demonstrate?

Answer 1

Connections between sectors of the economy
Flows of goods + services
Factors of production between firms + households

Question 2

What are the 4 parts of the circular flow?

Answer 2

Households
Firms
Government
External sector

Question 3

How do households contribute to the circular flow?

Answer 3

Receive income from job
Either consume or spend

Question 4

How do firms contribute to the circular flow?

Answer 4

Output meets consumer demand
Pay wages to households
Make investments to expand

Question 5

How does the government contribute to the circular flow?

Answer 5

Collect taxes from households + firms
Government spending

Question 6

How does the external sector contribute to the circular flow?

Answer 6

Buys imports from other nations
Sells domestic produce to other nations

Question 7

Give 3 leakages that occur within the circular flow

Answer 7

Savings
Taxes
Imports

Question 8

Give 3 injections that occur within the circular flow

Answer 8

Investment
Govt spending
Exports

Question 9

What is transferred from firms to households within the circular flow?

Answer 9

Income: Wages, dividends, interest, profits + rent

Question 10

What is transferred from households to firms within the circular flow?

Answer 10

Demand: Purchase of goods + services

Question 11

What will happen if leakages are greater than injections?

Answer 11

Economy shrinks
Decrease in GDP