Topic 1.1 - The Circular Flow Of Income

Question 1

What is economic activity?

Answer 1

Activity of making, producing, purchasing or selling goods and services

Question 2

What is the circular flow of income?

Answer 2

Describes relationship between total flow of income, output and expenditure in an economy
Suggests total level of economic activity can be measured in 3 ways: total income, expenditure and output produced

Question 3

What does the circular flow of income model look like?

Answer 3

Question 4

What is a leakage?

Answer 4

Where money flows out of the circular flow

Includes savings, taxes and imports (equals MPW)

Question 5

What are injections?

Answer 5

Where money flows into the circular flow

Exports, investment, gov spending

Question 6

When is balance achieved in the overall economy?

Answer 6

When planned injections = planned leakages

Question 7

What is average propensity to save?

Answer 7

Proportion of income devoted to saving

Question 8

What is average propensity to consume?

Answer 8

Proportion of income households devote to consumer expenditure

Question 9

What is marginal propensity to consume?

Answer 9

Proportion of additional income that households devote to consumer expenditure

Question 10

What is marginal propensity to withdraw?

Answer 10

How much of any addition to circular flow that can be withdrawn (leakages)
MPW = MPT + MPM + MPS
(Savings, taxes, imports)