The National Economy - The circular flow of income

10 important questions on The National Economy - The circular flow of income

What is aggregate demand (AD)? 

The total spending on goods and services made within the country (domestically produced goods and services).

What does AD consist of? Name the 4 parts?

1. Consumer spending (C)
2. Investments (I)
3. Government expenditure (G)
4. Export (X) - Import (M)

In what way can a firm pay money to the household? Name 3. 

1. Wages and salaries
2. Dividend on shares
3. Interest and rent

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What can households supply? Name 2. 

1. Labour
2. Capital and land

Why isn't the inner flow simple where Y = E?

Because not all income gets passed the inner flow, or in another way said: not all of the income (Y) is spend (E): there are withdrawals. 

Name 3 types of withdrawals (W)?

1. Savings (S)
2. Net taxas (T)
3. Import (M) = not home-produced goods 

Name 3 types of injections (J)?

1. Investments (I)
2. Government expenditure (G)
3. Exports (X) = sell to other countries

1. What is the consequence for banks when savings goes up?
2. What is the consequence when taxes increase?
3. What will happen when M increases? 

1. Banks have more money they can lend out. 
2. There will be an increase in G, because they earnt more money because of the higher taxes. 
3. The income of people abroad will increase and X will increase, because people can buy more in our country. 

What happens when the J are higher than W? 

Level of expenditure rises -> AD will rise -> this causes an increase in sales at firma -> firms will increase output -> wages, salaries, profits, rents and interest will rise -> NATIONAL INCOME RISES 

When J is bigger than W, there isn't an equilibrium. How does the natural mechanism work to restore this equilibrium? 

Y rises -> households spend more on domestic goods (C), but also save (S) more, pay more taxes (T) and buy more importen (M) -> total withdrawals rise until equilibrium is restored. 

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