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    the rest of the world impacts the circular flow with leakages and injections. which of the following correctly identify these leakages and injections?

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    Circular Flow of Economic Activity: The Flow of Goods, Services & Resources

    The circular flow model of economic activity is used to explain the relationship between businesses, households, and the government. Learn about...

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    Circular Flow of Economic Activity: The Flow of Goods, Services & Resources

    Instructor: Jon Nash

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    The circular flow model of economic activity is used to explain the relationship between businesses, households, and the government. Learn about the flow of goods and services in a market economy, the factors of production, and how the circular flow model of economic activity applies to real-world situations. Updated: 08/14/2021

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    Circular Flow of Economic Activity

    The circular flow of economic activity is a model showing the basic economic relationships within a market economy. It illustrates the balance between injections and leakages in our economy. Half of the model includes injections, and half of the model includes leakages. The circular flow model shows where money goes and what it's exchanged for. The model includes households, businesses and governments. We also have the banking system that facilitates the exchange of money and, as we'll see in a minute, helps to productively turn savings into investment in order to grow the economy. In the circular flow of the economy, money is used to purchase goods and services. Goods and services flow through the economy in one direction while money flows in the opposite direction.

    The circular flow model shows the balance of economic injections and leakages

    The factors of production include land, labor, capital and entrepreneurship. The prices that correspond to these factors of production are rent, wages and profit. People in households buy goods and services from businesses in an attempt to satisfy their unlimited needs and wants. Households also sell their labor, land, and capital in exchange for income that they use to buy goods and services that firms produce. Businesses sell goods and services to households, earning revenue and generating profits. Businesses also pay wages, interest and profits to households in return for the use of their factors of production. Governments levy taxes on households and businesses in order to provide certain benefits to everyone.

    Quiz Course 305K views

    Injections and Leakages

    Let's talk about injections and leakages. When you look at the circular flow model more closely, you find that there are things that inject money into the economy and other things that leak out of the economy. Injections into the economy include investment, government purchases and exports while leakages include savings, taxes and imports.

    Savings leaks out to borrowers as it goes through the banking system, and borrowers use the money to buy goods and services, which then injects the money back into the circular flow. Government taxes leak out of the circular flow model, and then government spending injects them back into the economy. Imports leak out of the economy because the money in our country that's used to buy imports from other countries goes out of our economy and into their hands. Exports, on the other hand, are an injection because we earn income from the goods and services we export to other countries.

    Circular Flow Model in Action

    The circular flow model involves businesses, workers, banks, and the government

    Let's look at an example of this model in action, featuring Margie and Dave.

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    Economics 102: Macroeconomics

    16 chapters | 137 lessons | 14 flashcard sets

    Ch 1. Scarcity, Choice, and the Production...

    Ch 2. Comparative Advantage, Specialization...

    Ch 3. Demand, Supply and Market...

    Ch 4. Measuring the Economy

    Circular Flow of Economic Activity: The Flow of Goods, Services & Resources

    6:03 7:44 Next Lesson

    Gross Domestic Product: Using the Income and Expenditure Approaches

    Gross Domestic Product: Definition and Components

    4:56

    Gross Domestic Product: Items Excluded from National Production

    6:07

    Investment vs. Investments in Economics

    8:19 Go to

    Measuring the Economy

    Ch 5. Inflation Measurement and...

    Ch 6. Understanding Unemployment

    Ch 7. Aggregate Demand and Supply

    Ch 8. Macroeconomic Equilibrium

    Source : study.com

    The circular flow of income

    The circular flow of income shows how income circulates between an economy's households and firms to generate output and employment.

    The circular flow of income

    The circular flow of national income refers to the process by which spending in an economy creates income which in turn creates more spending. A country's national income is the value of all the economic activity generated through this income-expenditure process.

    Gross Domestic Product (or GDP) is the commonest measure of an economy’s national income and includes the output of all 'new' goods and services produced over a period of time – usually one year. (Read more on national income statistics).

    For an activity to be included in the measurement of national income it must add value. This means that not all transactions are included in the circular flow of income and in calculating national income. Gifts between family members, welfare transfers between the state and individuals, and the transfer of second-hand goods are not included in the measurement of national income. However, commissions and other income from selling second hand goods is included in the calculation of national income.

    Nominal and real income

    While the ‘nominal’ value of GDP is the sum of all goods and services produced within a country in terms of the current monetary value of output, ‘real’ GDP is the value of output after the effects of price inflation have been stripped out. This is achieved by setting a 'base' year which acts as a 'freeze frame' of current prices in that year. In future years, the current value of GDP is 'deflated' by the amount that prices have risen by in each year.

    In simple terms, if inflation is running at 4% a given year, any increases in nominal GDP are deflated by 4% to arrive at real GDP.

    Changes in real GDP, and GDP per head (per capita) are key indicators of economic performance.

    Read more on calculating GDP using index numbers

    Households and firms

    Spending in an economy circulates between its two key sectors, households and firms.

    Households supply factors of production to firms, including labour, capital, land and enterprise. In return they receive factor incomes – wages, interest, rent, and profits.

    This income is converted into expenditure to buy goods and services from firms. Consumer demand is met by firms as they produce an output of goods and services. The firms receive an income in the form of revenue, and use this income to pay for the factors they use.

    In terms of the simple circular flow, income flows continuously backwards and forwards between households and firms as they engage in transactions, generating output and employment.

    The addition of withdrawals (leakages) and injections

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    The smooth and continuous circular flow of income is disturbed as a result of income leaving the circular flow. Households are likely to save (S) some of their income (Y) which is a leakage out of the circular flow, and reduces expenditure and income - effectively making the economy smaller.

    Households also pay taxes (T) to the government, which are another leakage, as is spending on imports (M) coming from abroad.

    These leakages leave the circular flow through three sectors – deposits into the financial sector, tax payments to government, and payments going abroad. While these leakages make the economy smaller, injections into the circular flow make the economy bigger.

    As firms produce, machinery wears out or better technology becomes available. Firms may borrow to spend on these capital goods, creating investment (I) which is an injection into the circular flow.

    Government spending (G) on merit goods and public goods is a further injection, along with overseas spending on a country’s exports (X).

    Open and closed economies

    A closed economy is one which does not trade with other countries, hence there are no imports and exports. Hence, total expenditure is just C+I+G.

    An open economy is one that trades with the rest of the world, hence total expenditure is C+I+G+(X-M).

    In reality, all countries trade, but the degree of openness varies considerably - the US, Canada, the UK and the rest of Europe are all very open economies, as is Singapore and Hong Kong. At the other extreme, North Korea, landlocked African countries, and Brazil are very closed. (While Brazil does trade, the ratio of trade to GNI is small.)

    Equilibrium

    The circular flow will be in a state of stable equilibrium when withdrawals are balanced by injections.

    Withdrawals reduce the size of national income, while injections increase it. It is only necessary for the sum of injections to equal the sum of withdrawals - not for the ‘pairs’ to equal each other. Hence:

    S + T + M = I + G + X

    While it is not necessary for S to equal I, or G to equal T, or X to equal M, it is argued that, in the long term, any differences between the pairs of injections and withdrawals should be sustainable.

    Source : www.learn-economics.co.uk

    Chapter 12 Study Guide

    After reading Chapter 12, you should understand:

    1. The circular flow of spending in the macroeconomy.

    2. The role of leakages and injections in finding equilibrium in the macroeconomy.

    3. The types of leakage and injections in the circular flow.

    4. The role of economic policy in helping the economy to attain full employment without inflation.

    5. How fiscal policy is used to improve the performance of the macroeconomy.

    6. How monetary policy is used to improve the performance of the macroeconomy.

    Chapter Summary

    There is a circular flow of spending in the economy in which households supply resources in resource markets.  Businesses demand resources to produce goods and services which they sell in product markets to households.  In an economy without any leakages or injections, total spending will equal total output and there never would be any unemployment.

    Leakages from the spending stream include savings, taxes and imports.  Injections include investment spending, government spending and exports.  When leakages equal injections, total spending will equal total output and the macroeconomy will be in equilibrium.  If leakages exceed injections, then total output exceeds total spending and the level of national output (GDP) will fall.  If injections exceeds leakages, then total spending exceeds total output and the level of national output will rise. Equilibrium may be reached at a level of GDP in which there is unemployment.  If there is too much spending, GDP may reach equilibrium at a level in which there is inflation.

    Economic policy is used to affect the levels of output, employment, and prices in the economy.  There are two types of demand management policies: fiscal policy and monetary policy. Fiscal policy is conducted by Congress and the President and involves changes in government spending and/or taxes.  In a recession, government spending is raised and taxes are lowered.  Both lead to more spending in the economy and help to increase GDP.  In an inflation, government spending is decreased and taxes are increased in an attempt to reduce spending in the economy. Monetary policy is conducted by the Federal Reserve System.  The money supply is increased in a recession and reduced in an inflation.

    Fill in the Blanks

    The movement of money, resources and goods through the economy is known as _____1______.  The macroeoconmy is in equilibrium when total _____2_____ equals total ____3____.   Equilibrium also occurs where leakages equal injections.  Leakages include _____4____, _______5____, and _____6____.  Injections include ______7_____, ____8____, and ____9____.   If total spending exceeds total output in the economy (or injections exceed leakages), then total output (GDP) will  _____10____.  If leakages exceeds injections, then total output will ____11____.

    Changing taxes and government spending in order to affect the levels of output, employment and prices is known as ______12____.  In a recession, taxes should be _____13____ and government spending should be ____14____.  Changing the level of the money supply in order to affect the levels of output, employment and prices is known as ____15____.  In a recession, the money supply should be ____16____, and in an inflation the money supply should be ____17___.

    Answers

    1. Circular Flow 2. Spending 3. Output 4. Taxes 5. Savings 6. Imports

    7. Investment Spending

    8. Government Spending

    9. Imports 10. Rise 11. Fall 12. Fiscal Policy 13. Lowered 14. Raised 15. Monetary Policy 16. Increased 17. Decreased

    Multiple Choice QuestionsReview Questions

    1. Which of the following is not considered to be a leakage in the Circular Flow Diagram?

    a. Imports of goods and services

    b. Taxes c. Saving d. Investment

    2. Which of the following is not considered to be an injection in the Circular Flow Diagram?

    a. Investment b. Saving c. Exports

    d. Government Spending

    3.  If leakages in the economy exceed injections, then we can expect:

    a. Inflation to be a problem in the economy.

    b. Unemployment to fall.

    c. Real GDP to fall.

    d. Exports to increase.

    4. The macroeconomy is in equilibrium when:

    a. total spending equals total output.

    b. leakages equal injections.

    c. real GDP will not tend to change.

    d. All of the above answers are correct.

    5. If total spending in the economy exceeds total output, we can expect:

    a. unemployment to rise.

    b. real GDP to rise.

    c. economic growth to fall.

    d. that the economy is now in equilibrium.

    6. Monetary policy is conducted by:

    a. the President. b. Congress.

    c. the Federal Reserve System.

    d. the Secretary of the Treasury.

    7. In a recession, Fiscal Policy would call for:

    a. a decrease in government spending.

    b. an increase in taxes.

    c. changes in taxes and government spending so as to boost total spending in the economy.

    d. increases in business inventories.

    8. In an inflation, the Federal Reserve System should:

    a. do nothing.

    b. enact an expansionary monetary policy.

    c. enact a contractionary monetary policy.

    d. try to reduce interest rates in the economy.

    Answers: Answers:

    Source : cstl-hcb.semo.edu

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