Outcome 2

Question 1

What is the circular flow of the economy?

Answer 1

It is a model showing the flow of money and goods between households and firms, highlighting their interdependence.

Question 2

What role do households play in the circular flow?

Answer 2

Households supply factors of production (land, labor, capital) to firms and spend income on goods and services.

Question 3

What role do firms play in the circular flow?

Answer 3

Firms produce goods and services, paying households wages, rent, interest, and profits for the use of factors of production.

Question 4

What are withdrawals in the circular flow?

Answer 4

Withdrawals are money leaving the flow, including savings, taxation, and imports.

Question 5

What are injections in the circular flow?

Answer 5

Injections are additional spending entering the flow, including investment, government spending, and exports.

Question 6

What happens when injections exceed withdrawals?

Answer 6

National income rises, indicating economic growth.

Question 7

What happens when withdrawals exceed injections?

Answer 7

National income decreases, signaling a contracting economy.

Question 8

What is the multiplier effect?

Answer 8

It is the idea that an initial injection into the economy leads to a larger overall increase in national income through subsequent rounds of spending.

Question 9

How does government spending influence the multiplier effect?

Answer 9

Government spending on infrastructure or other projects creates jobs, leading to increased spending and further economic growth.

Question 10

What are criticisms of the multiplier effect?

Answer 10

Criticisms include potential time lags, crowding out private investment, and inflationary pressures.

Question 11

What is GDP?

Answer 11

Gross Domestic Product measures the total output, income, and spending of a country.

Question 12

What are the components of GDP?

Answer 12

Consumption, investment, government spending, and net exports.

Question 13

How is GDP measured?

Answer 13

GDP is measured using the income, expenditure, and output methods.

Question 14

What is the difference between real GDP and nominal GDP?

Answer 14

Real GDP adjusts for inflation, showing changes in actual production, while nominal GDP uses current prices.

Question 15

What are limitations of GDP as a measure of economic performance?

Answer 15

GDP excludes shadow economy activities, unpaid work, and transfer payments, and does not account for quality of life or income distribution.

Question 16

Why are national income comparisons between countries challenging?

Answer 16

Challenges include differences in statistical accuracy, population size, currency fluctuations, and spending priorities.

Question 17

What is the shadow economy?

Answer 17

The shadow economy includes unrecorded transactions like illegal trade or tax-avoiding cash transactions.

Question 18

How do countries differ in their GDP spending priorities?

Answer 18

Spending on areas like defense or space research may not improve average living standards but reflects national priorities.

Question 19

What are the three methods for calculating GDP?

Answer 19

Income method, expenditure method, and output method.

Question 20

Why must GDP data be interpreted carefully?

Answer 20

GDP figures must distinguish between real and nominal values to understand changes in actual production versus price changes.