Classical Theory 1

Question 1

Households

Answer 1

The basic consuming units in the economy, supplying labour and capital and demanding goods and services

Question 2

Firms

Answer 2

The productive units in the economy, demanding labour and capital and supplying goods and services

Question 3

The government

Answer 3

The entity responsible for providing public goods and services, levying taxes and influencing the economy through fiscal policy

Question 4

Markets for goods and services

Answer 4

Where households demand and firms supply labour capital and other inputs

Question 5

Markets for FOP

Answer 5

Where firms demand and households supply labour, capital and other inputs

Question 6

Financial Markets

Answer 6

Where savings are channelled to borrowers, faciliating investment and economic growth

Question 7

Circular flow assumption

Answer 7

-Closed economy
-Market clearing meaning that prices adjust to equate supply and demand
-Rational Economic Agents
-Perfectly competitive Markets
-Complete information

Question 8

Injections

Answer 8

Additions to the circular flow of income, boosting aggregate demand and activity- Investment, Government expenditure and consumption

Question 9

Withdrawls

Answer 9

Leakages from the circular flow of income, reducing demand and economic activity- Savings taxes etc.