introduction to the circular flow of income chapter 16

Question 1

what does circular flow of income model show

Answer 1

shows how income, spending and output move around an economy. The model shows that output generates income which is then spent on the output. This flow explains why GDP can be measured by calculating the country’s output, income and expenditure.

Question 2

open economy

Answer 2

an economy that is involved in trade with other economies.

Question 3

closed economy

Answer 3

an economy that does not trade with other economies. no economy is totally closed

Question 4

injectios

Answer 4

additions to the circular flow of income. investments, government spending and spending by foreigners on country’s exports

Question 5

leakages

Answer 5

withdrawals from the circular flow of income. some income is saved, some is taxed and some is spent on imports

Question 6

what has to be done for income to be inchanged

Answer 6

For income to be unchanged, injections of extra spending into the circular flow of income must equal leakages from the circular flow.

Question 7

why does income rise

Answer 7

If injections are greater than leakages, there will be extra spending in the economy, causing income to rise.

Question 8

why does income fall

Answer 8

if leakages exceed injections, more spending will leave the circular flow, and income will fall.

Question 9

what does investments cause

Answer 9

A rise in investment will cause a rise in GDP. The higher investment results in an increase in production, income and spending.

Question 10

effect of saving

Answer 10

an increase in saving will mean that some products will be unsold and so production will fall. a fall in saving increase GDP

Question 11

The equilibrium level of income

Answer 11

The equilibrium level of income refers to when an economy or business has an equal amount of production and market demand

Question 12

the circular flow in a closed economy

Answer 12

consumers receive goods and services from firms-money flows to firms as consumer spending
firms receive factor services from consumers-money flows to consumers as factor payments

Question 13

the circular flow in an open economy

Answer 13

it is the same as the one in circular economy but:
leakages such as direct taxes paid and money is saved from factor payments
factor payments include exports and government spending
investments are injected into consumer spending
indirect taxes and imports are leaked from consumer spending

Question 14

factor services

Answer 14

labour, capital, entrepreneurship and land

Question 15

factor payments

Answer 15

wages, interest, profit and rent

Question 16

links between injection and leakages

Answer 16

Injections are the introduction of income into the flow, such as additions to investment, government expenditure and exports. Leakages are the withdrawal of income from the flow, such as savings, taxation and imports.