The Circular Flow

Question 1

What is the Robinson Crusoe economy

Answer 1

the simplest version of the circular flow model (coconuts)

Question 2

what are the 2 types of activities that describe the entire economy

Answer 2

production and consumption

Question 3

______ are the producers, _______ are the consumers

Answer 3

firms, households

Question 4

Firms pay income to households (the net amount of income is called ________, denoted by Y); households pay money to consume goods (the net amount is called _______, denoted by C)

Answer 4

aggregate income, consumption

Question 5

The circular flow model assumes that savings are all kept in the ___________ (banks, stocks, bonds, insurance, etc.)

Answer 5

financial markets

Question 6

there is more savings than borrowing, so there is a _________ from households into the financial markets

Answer 6

net flow of savings

Question 7

Firms also borrow money from the financial markets, in order to make __________.

Answer 7

investments

Question 8

what are investments

Answer 8

the purchase of capital factors (ex. property, equipment) to be used to produce goods and services

Question 9

what are private savings

Answer 9

The total amount of savings by households and firms

Question 10

Y = C + PS

Answer 10

income to households equals the sum of consumption and private savings

Question 11

Y = C + I

Answer 11

income to households equals the sum of consumption and investments

Question 12

what formula shows proves that savings are used for investment

Answer 12

I = PS

Question 13

Government collects _______ from households, denoted by T

Answer 13

taxes

Question 14

what factor is denoted by G

Answer 14

Government purchases

Question 15

Y = C + PS + T

Answer 15

income to households equals the sum of consumption, private savings, and taxes

Question 16

income spent by the government

Y = C + I + G

Answer 16

income to banks equals the sum of consumption, investments, and government purchases

Question 17

what is T – G

Answer 17

the government’s net savings (the difference between money collected and spent)

Question 18

what are national savings?

Answer 18

PS + (T – G)

the sum of private and government savings, denoted by S

Question 19

when government does not collect enough taxes to pay for all of its spending it must ________________.

Answer 19

borrow from the financial markets

Question 20

When there is a ___________, the government actually saves in the financial markets

Answer 20

government surplus

Question 21

what is X

Answer 21

net exports, or Exports – Imports

Question 22

Y = C + I + G + X

Answer 22

income to banks equals the sum of consumption, investments, government purchases, and net exports

Question 23

National savings is the sum of

Answer 23

government savings and private savings

Question 24

S = I + X

Answer 24

national savings is equal to the sum of investments and net exports