Topic 2 Key Concepts and Teminology Flashcards
What does the Circular Flow of Income Model illustrate?
The continuous movement of spending and income between the different sectors of an economy.
Name the five sectors of the Circular Flow.
- Households
- Businesses (Firms)
- Financial Sector
- Government Sector
- Overseas Sector
Who are considered households in the Circular Flow model?
Individuals who own the factors of production and consume goods and services.
What is the role of businesses in the Circular Flow model?
Produce goods and services using the factors of production.
What does the financial sector include?
Institutions that facilitate borrowing and lending of money.
What are injections in the Circular Flow model?
Flows of money into the main circular flow, increasing aggregate demand and economic activity.
List the types of injections.
- Investment (I)
- Government Expenditure (G)
- Exports (X)
What are withdrawals (leakages) in the Circular Flow model?
Flows of money out of the main circular flow, reducing aggregate demand and economic activity.
List the types of withdrawals.
- Savings (S)
- Taxation (T)
- Imports (M)
What is Aggregate Demand (AD) and how is it calculated?
The total demand for goods and services in an economy at a given price level, calculated as: AD = Consumption (C) + Investment (I) + Government Expenditure (G) + Net Exports (X – M).
Define Aggregate Supply (AS).
The total supply of goods and services that firms in an economy are willing and able to produce at a given price level.
What is Gross Domestic Product (GDP)?
The total market value of all final goods and services produced within a country’s borders in a specific time period.
What does Consumption (C) refer to?
Spending by households on goods and services.
What is the definition of Exports (X)?
Goods and services produced domestically and sold to overseas residents.
What is Government Expenditure (G)?
Spending by the government on goods and services.
What are Imports (M)?
Goods and services bought by domestic residents from overseas.
Define Investment (I) in the context of the Circular Flow.
Spending by businesses on capital goods.
What is a subsidy?
A payment made by the government to producers to encourage the production of a particular good or service.
What are taxes?
Compulsory payments made by individuals and businesses to the government.
What is the Economic Cycle (Business Cycle)?
The periodic fluctuations in the level of economic activity, typically characterised by phases of expansion and contraction.
What is the Equilibrium Condition in the Circular Flow?
Occurs when total injections equal total withdrawals, representing a stable level of economic activity.
True or False: Equilibrium requires S=I, T=G, or M=X individually.
False
What is the Paradox of Thrift?
The idea that if everyone tries to save more during an economic downturn, it can lead to a decrease in aggregate demand.
What is the Resources Market?
The market where households supply factors of production to businesses.
What is the Goods Market?
The market where businesses supply goods and services to households, government, and the overseas sector.
What is the Cash Rate?
The interest rate target set by the Reserve Bank of Australia for the overnight money market.
Define Basis Points.
A unit equal to 1/100th of a percentage point (0.01%).
What are Percentage Points?
A unit equal to one percent (1%).
