4.2.1 The circular flow of income

• What is the circular flow of income model designed to illustrate?

  Movement of money
• Households provide factors of production to firms in the circular flow of income.


  True
• Injections add money into the economy, while leakages remove money from the economy.
• Order the flow of income between households and firms in the circular flow model:

  1️⃣ Households provide factors of production to firms.

  2️⃣ Firms produce goods and services.

  3️⃣ Firms pay factor incomes to households.

  4️⃣ Households spend income on goods and services.
• The circular flow of income is influenced by injections and leakages.
• Order the flow of money and goods/services in the circular flow model:

  1️⃣ Households provide factors of production to firms.

  2️⃣ Firms produce goods and services.

  3️⃣ Firms pay factor incomes to households.

  4️⃣ Households spend income on goods and services.
• What do households provide to firms in the circular flow of income model?

  Factors of production
• Injections into the circular flow of income include investment, government spending, and exports
• Match the type of flow with its direction in the circular flow of income:

  Goods and Services ↔️ Households ⇒ Firms

  Factor Incomes ↔️ Firms ⇒ Households
• Banks contribute to economic stability by promoting savings and investments.


  True
• What are the two primary components of the circular flow of income?

  Flow of goods and services ||| Flow of money
• Exports are a leakage in the circular flow of income.

  False
• Households provide factors of production and receive factor incomes
• What flows from firms to households in the circular flow of income?

  Factor incomes
• Banks contribute to economic growth by ensuring the efficient allocation of capital.


  True
• What is one purpose of lending by banks and financial institutions?

  Business investments
• Banks and financial institutions contribute to economic stability by ensuring efficient allocation of capital.


  True
• How do banks increase the availability of funds for lending?

  Accepting deposits
• Banks help stabilize the financial system by managing liquidity and risk.

  True
• The spending cycle between households and firms is continuous and self-reinforcing
• Why is savings considered a leakage from the circular flow of income?

  Removes money from spending
• High savings and low investment can lead to lower economic growth.


  True
• What are the main injections into the circular flow of income?

  Investment, government spending, exports
• At equilibrium, there is no excess aggregate demand or supply.


  True
• The circular flow of income illustrates how money moves between households and firms
• What are the four factors of production provided by households to firms?

  Land, labor, capital, enterprise
• The circular flow of income demonstrates how resources and money move between households and firms
• Steps in the flow of goods and services in the circular flow of income

  1️⃣ Households provide factors of production

  2️⃣ Firms use factors of production to produce goods and services
• Banks provide loans to households and firms for purposes such as mortgages and business investments.
• Payment services facilitate transactions between buyers and sellers through electronic and traditional payment systems.
• Match the financial institution with its main function:

  Banks ↔️ Lending, deposit taking, payment services

  Credit Unions ↔️ Lending, deposit taking

  Insurance Companies ↔️ Risk management, investment

  Investment Firms ↔️ Investment management, financial advice
• The flow of expenditures and spending is a key component of the circular flow of income.
• Investment is an injection into the circular flow because it adds money back into the economy.
• Equilibrium in the circular flow occurs when total injections equal total leakages.
• One of the main leakages in the circular flow is imports.
• Equilibrium in the circular flow occurs when total injections equal total leakages.

  True
• Match the type of leakage with its description:

  Savings ↔️ Money not spent by households

  Taxes ↔️ Payments to the government

  Imports ↔️ Money spent on foreign goods
• Equilibrium in the circular flow ensures stable output, employment, and prices.


  True
• A weaker domestic currency makes exports cheaper and imports more expensive
• What can policymakers do to maintain a balanced circular flow?

  Manage injections and leakages