2.1 Introductory Lesson

Question 1

What does the circular flow of income show?

Answer 1

• The circular flow shows connections between different sectors of our economic system.
• It revolves around flows of goods/services, factors of production, and money, between households, governments, and firms and also abroad

Question 2

Draw the circular flow model

Answer 2

Question 3

How do injections into the circular flow lead to a multiplied expansion of output?

Answer 3

• People spending money on UK exports
• Government spending
• Investment

Question 4

What are the 3 injections in the circular flow of income model?

Answer 4

• Government spending
• Exports
• Investments

Question 5

What are the 3 injections in the circular flow of income model?

Answer 5

• Government spending
• Exports
• Investments

Question 6

What are the leakages from the circular flow?

Answer 6

• People spending money on imports
• People save money
• People being taxed

Question 7

What are the 3 withdrawals from the circular flow model?

Answer 7

• Imports
• Taxation
• Saving

Question 8

What would increase the output of an economy? (Circular flow of income)

Answer 8

• When Injections > Leakages
• Exports, Government spending, Investments > Imports, Taxation, and Saving
• This will lead to an increase in the output of an economy

Question 9

What would decrease the output of an economy? (Circular flow of income)

Answer 9

• When Injections < Leakages
• Exports, Government spending, Investments < Imports, Taxation, and Saving
• This will lead to an decrease in the output of an economy

Question 10

What is spare capacity?

Answer 10

• Spare capacity is when there are spare factors of production (Including Land, Labour and Capital)

Question 11

If the economy grows too quickly, what might the economy experience?

Answer 11

• As the economy keeps on growing there will be a continual decrease in spare capacity
• Little spare capacity leads to higher wages which in turn leads to increased prices
• Therefore leading to inflation

Question 12

What might the government/central bank do if the economy was in a recession?

Answer 12

• Decrease interest rates
• Increase government spending and decrease taxes
• Subsidies like eat out to help out

Question 13

What is a recession?

Answer 13

• 2 consecutive quarters of negative growth
• A quarter refers to one-fourth of a year

Question 14

What does real mean?

Answer 14

Real means inflation adjusted

Question 15

What does Nominal mean?

Answer 15

Nominal means before inflation/raw value

Question 16

Why are Index Numbers used in economics?

Answer 16

To allow comparison and to simplify

Question 17

What is the formula for Index Numbers?

Answer 17

Question 18

What is the formula for percentage change?

Answer 18

Question 19

What might the government do if the economy is growing too quickly?

Answer 19

• Increase interest rates
• Stop government spending
• Increase taxes (very unpopular)