Theme 2.5: The circular flow of income

Question 1

What does Income flow between?

Answer 1

Income flows between Firms and Households

Income flows from Firms to Households via income (wages)

Income flows from Households to Firms via expenditure (people buying the goods and services from that Firm)

Question 2

What types of injections are there into the flow of income?

Answer 2

Injections include:
exports,
investments,
and government spending

Question 3

What types of withdrawals are there from the flow of income

Answer 3

Withdrawals include:
imports,
savings,
and taxes

Question 4

When injections and withdrawals are equal, what happens to the economy

Answer 4

It is equilbrium

Question 5

Multiplier Effect

Answer 5

The multiplier effect is the name given to the idea that when money is injected into an economy, the total change in national income, is greater than that of the original investment.

Question 6

Wealth

Answer 6

Wealth is the total value of all the assets owned by individuals or firms in an economy

Question 7

Assets

Answer 7

Assets can include actual money, e.g. savings, and physical items, e.g. house or cars

Question 8

Wealth vs Income

Answer 8

Unlike income, which is a flow of money, wealth is a stock of concept. There is however a link between the two. Someone with a high income is likely to have a large amount of wealth.