Ch. 19

• What does the circular flow of income model represent?

  Movement of goods and services between households and firms
• What are leakages in the circular flow of income?

  Money flows out in savings, taxation, and imports
• What are injections in the circular flow of income?

  Money flows in from investment, government spending, and exports
• What does gross domestic product (GDP) measure?

  Total level of economic activity in an economy
• How is consumption defined in the context of the circular flow of income?

  Use of goods and services to satisfy wants
• What is disposable income?

  Income available for consumption and saving after taxes
• What does the rate of interest represent?

  Cost of borrowing and reward for lending
• What is the consumption function?

  Relationship between consumer expenditure and disposable income
• What does investment refer to in the circular flow?

  Expenditure by firms to add to capital stock
• What does the aggregate demand (AD) curve illustrate?

  Relationship between aggregate demand and overall price level
• What is the wealth effect?

  Increase in price level reduces purchasing power