U1 AOS1 - Lesson 5 - Circular Flow Model

Question 1

The three sectors of the circular flow model

Answer 1

Household, Business, Government

Question 2

True/False: Households only provide labour as a resource to the business sector

Answer 2

False: households provide resources to the business sector in the form of labour, natural or capital resources in return for an income.

Question 3

The first flow between Households and Businesses

Answer 3

The flow of resources (natural, labour and capital)

Question 4

The second flow of the circular flow model from Businesses to Households

Answer 4

The flow of income (wages, rent, dividends, etc)

Question 5

Circular Flow Model

Answer 5

Question 6

True/False:

Flows in the circular flow model must equal each other

Answer 6

True

Question 7

True/False:

Tax revenue must equal government spending

Answer 7

False

Government can run a budget deficit where government spending exceeds tax revenue, or they can also run a budget surplus, where tax revenue exceeds government spending.

A balanced budget (where spending = tax) is rare.

Question 8

Leakages in 3 Sector Circular Flow Model

Answer 8

Taxation

Question 9

Injections in 3 Sector Circular Flow Model

Answer 9

Government Spending

Question 10

VCAA 2017 Q8

According to the [three]-sector circular flow model of the economy, a rise in the total value of injections relative to the total value of leakages is most likely to result in

A. a decrease in consumption and a decrease in levels of aggregate demand.

B. a decrease in total incomes and a rise in the unemployment rate.

C. neither a decrease in consumption, levels of aggregate demand and total incomes, nor a rise in the unemployment rate.

D. a decrease in consumption, levels of aggregate demand and total incomes, and a rise in the unemployment rate.

Answer 10

Draw out flows:
* Increased injections relative to leakages → increased government spending and reduced taxation

Increasing injections relative to leakages means that overall expenditure increases and aggregate demand increases → eliminate A and D

Increased aggregate demand → eventually flows into higher income → eliminate B

C is correct answer (74% of state answered correctly)

Question 11

Which of the following is not a sector in the three sector circular flow model?

A. Government
B. Capital
C. Business
D. Household

Answer 11

B

Question 12

Calculate values for

• Flow 1, 2 and 4
• Government spending

Answer 12

All flows must be equal so all flows = $25,000

Government spending = $10,000

Note - here, consumer spending and tax do not add to $25,000. This is possible because other leakages exist, including savings and imports

Question 13

Which statement about the three sector flow model is incorrect?

A. There are four flow streams
B. One sector involves all individuals and the other sectors include firms in public and private sectors
C. The various flows are assumed to be equal and interdependent
D. The model shows the effects of savings and spending on foreign goods and services

Answer 13

D

Question 14

If spending by households and governments fell from $60bn to $55bn, which of the following sequence would occur in the three sector flow model?

A. National production would decline by $5bn, incomes would fall and unemployment would fall
B. National incomes would rise $5bn, along with the purchase of resources and production
C. National employment of resources would likely fall by $5bn, GDP would decline and incomes would decrease
D. GDP would fall by $5bn so demand for resources and incomes would also decrease

Answer 14

D

Flow 3 is spending by governments and households → Flow 4 (GDP) → Flow 1 (Resources) → Flow 2 (Incomes)