The Circular Flow Flashcards
(24 cards)
What is the Robinson Crusoe economy
the simplest version of the circular flow model (coconuts)
what are the 2 types of activities that describe the entire economy
production and consumption
______ are the producers, _______ are the consumers
firms, households
Firms pay income to households (the net amount of income is called ________, denoted by Y); households pay money to consume goods (the net amount is called _______, denoted by C)
aggregate income, consumption
The circular flow model assumes that savings are all kept in the ___________ (banks, stocks, bonds, insurance, etc.)
financial markets
there is more savings than borrowing, so there is a _________ from households into the financial markets
net flow of savings
Firms also borrow money from the financial markets, in order to make __________.
investments
what are investments
the purchase of capital factors (ex. property, equipment) to be used to produce goods and services
what are private savings
The total amount of savings by households and firms
Y = C + PS
income to households equals the sum of consumption and private savings
Y = C + I
income to households equals the sum of consumption and investments
what formula shows proves that savings are used for investment
I = PS
Government collects _______ from households, denoted by T
taxes
what factor is denoted by G
Government purchases
Y = C + PS + T
income to households equals the sum of consumption, private savings, and taxes
income spent by the government
Y = C + I + G
income to banks equals the sum of consumption, investments, and government purchases
what is T – G
the government’s net savings (the difference between money collected and spent)
what are national savings?
PS + (T – G)
the sum of private and government savings, denoted by S
when government does not collect enough taxes to pay for all of its spending it must ________________.
borrow from the financial markets
When there is a ___________, the government actually saves in the financial markets
government surplus
what is X
net exports, or Exports – Imports
Y = C + I + G + X
income to banks equals the sum of consumption, investments, government purchases, and net exports
National savings is the sum of
government savings and private savings
S = I + X
national savings is equal to the sum of investments and net exports
