Unit 8.1

Question 1

The circular flow of income

Answer 1

(closed one) is an economic model that illustrates the flow of money between firms and households at a macroeconomic level

(Open one) includes financial markets. governments and other countries.

Question 2

What can the two sectors be divided in

Answer 2

Households and firms

Question 3

What are the two markets which firms and households sell and receive from

Answer 3

Resource market
product market

Question 4

Explain the close market in terms of households

Answer 4

Households provide factors of production (land labour capital enterprenership) to resource markets
They receive household income (rent, wages, interest, profit).

Household expenditure towards product markets.
They receive goods and services from the products market

Question 5

Explain the closed circular model of income from firms

Answer 5

Firms receive factors of production from resource market, and their expenditure is cost of production which goes towards the resource market.

Firms provide goods and services in the product market and receive revenue from it.

Question 6

What are the leakages in the open circular model

Answer 6

Savings
taxes
spending on imports

Question 7

What are the injections in the open circular model

Answer 7

investment
government spending
spending on exports

Question 8

sum of injections > the sum of leakages

Answer 8

circular flow growth bigger, production of goods and services increase, income increase, the economy growth, unemployment decrease

Question 9

sum of injections < the sum of leakages

Answer 9

circular flow shrinks, production of goods and services decrease, income decrease, the economy is in recession, unemployment increase