Economics - Chapter 12
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- Created on: 29-12-14 20:37
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- Chapter 12: The circular flow of income
- The flow of money and income is circular as:
- The income earned by the households allows them to buy the goods/services that are sold by the firms
- The firms use the factors of production and they are paid through their wages
- Households buy the goods with the money they have earned in working for firms
- The money passes from firms to households and then back again
- Injections
- An increase in injections increase the level of national income
- Government expenditure, imports and investment
- Withdrawals
- Savings, Exports and Taxation
- Increases in withdrawals reduce the size of the national income
- Savings are income induced
- They are expected to increase when incomes increase and vice versa
- Savings would imply a decrease in consumption and a decrease in expenditure for firms = aggregate demand would fall
- If injections and withdrawals are not equal, the economy is in disequilibrium
- If the sum of injections < than the sum of withdrawals = national income falls
- If the sum of injections > than the sum of withdrawals = national income increases
- The sum of injections = the sum of withdrawals = national income is in equilibrium
- Changes in consumption
- The Wealth Effect
- Expectations
- Inflation
- The Rate of Interest
- The flow of money and income is circular as:
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