IA3 - In-class essay

Question 1

what does contemporary mean?

Answer 1

current

Question 2

what does macroeconomic mean?

Answer 2

australia wide (GDP, inflation, unemployment)

Question 3

what is the aggregate expenditure model?

Answer 3

aggregate demand and supply will be examined to model the level of output in the economy, to better understand how the government can develop policies to sustain economic growth.

Question 4

define circular flow of income model

Answer 4

a model of the economy, based on income flows from one sector of the economy to another in a circular motion, which explains levels of national income and output, and how changes in these occur

Question 5

define equilibrium

Answer 5

a balanced situation from which there is no tendency to change; for example, the level of output or income bought about by conditions in an economy

Question 6

expenditure

Answer 6

outflows of money from one sector of an economy to another

Question 7

define income

Answer 7

inflows of money to one sector of an economy to another

Question 8

define injection

Answer 8

inflows of income into the circular flow of income model

Question 9

define leakage

Answer 9

outflow of expenditure from the circular flow of income model

Question 10

define output

Answer 10

production of goods and services in an economy from combining land, labour, capital and enterprise

Question 11

paradox of thrift

Answer 11

increased savings represent a diminishing circular flow of income; as everyone tries to save an increasingly larger portion of their incomes, the nation becomes poorer instead of richer

Question 12

what are the 5 sectors of the circular flow model (CFM)?

Answer 12

1. household sector
2. business/production sector
3. government sector
4. financial sector
5. foriegn sector

Question 13

what is the limitation of the CFM?

Answer 13

• it does not show all flows
• i.e. government assistance to businesses as it would make the diagram and equation too complicated

Question 14

what is the CFM equation and what does it measure?

Answer 14

• Y=O=E: three different ways of measuring the same thing, just measured on different points of the diagram
• y = total income = Y=C+S+T+M; tells us what people do; leakages with their income
• O = the value of the total output of production = O=C+I+G+X; tells us what is produced in the economy (injections)
• E=total expenditure

Question 15

describe the 2 sector model?

Answer 15

• only the household and business sectors
• the economy would always be in equilibrium