Economics - Chapter 12

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  • Created by: sammilaw
  • 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


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