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Questions and Answers
What is the purpose of the Circular Flow Model?
The Financial Sector provides subsidies to firms.
False
What happens to the economy when Injections are greater than Leakages?
The economy grows in size (Economic Growth)
GDP stands for _______________________________.
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Match the following sectors with their roles in the economy:
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What happens to the economy when Leakages are equal to Injections?
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Buying locally is the best for the economy.
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What does the term 'Leakages' represent in the economy?
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Which of the following is a characteristic of a market economy?
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The government plays a dominant role in a mixed economy.
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What is the primary motivation for individual behavior in a planned economy?
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A mixed economy combines aspects of the ______________________ and planned economy.
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Match the following political parties with their alignment on the Australian political spectrum:
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What is a key feature of a mixed economy?
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In a market economy, the government allocates resources.
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What is the role of frameworks and regulations in a mixed economy?
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What is the primary role of the Australian Competition & Consumer Commission?
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The Australian Taxation Office (ATO) is responsible for implementing fiscal policies.
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What is the main goal of a carbon tax?
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A carbon tax works on the basis of the economic principle of ______________________.
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What is a benefit of a carbon tax?
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Match the following with their roles in a Green Economy:
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The implementation of a carbon tax has only environmental impacts.
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What is the relationship between a carbon tax and negative externalities?
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Study Notes
Circular Flow Model
- The purpose of the circular flow model is to illustrate the flow of income, money, resources, and output in a given economy.
- It shows how different sectors of the economy fit together.
Two-Sector Circular Flow Model
- This model consists of two sectors: Firms and Households.
- Firms output goods and services to households, and their costs contribute to households' income.
- Households provide factors of production to firms and receive firms' revenue through consumer expenditure.
Five-Sector Circular Flow Model
- The five sectors are: Firms, Households, Financial Sector, Government Sector, and Overseas Sector.
- Firms output goods and services to households.
- Households provide factors of production to firms and receive firms' revenue through consumer expenditure.
- Financial Sector provides interest to households and investments to firms, and receives savings from households and interest from firms.
- Government Sector provides welfare payments to households and subsidies to firms, and receives taxation from households and firms.
- Overseas Sector provides imports to households and revenue from imports to firms, and receives expenditure on imports from households and exports from firms.
Leakages and Injections
- Leakages represent money that is removed from or lost to the economy.
- Injections represent money that is added to the economy.
- When injections are greater than leakages, the economy grows.
GDP Calculation
- GDP (Gross Domestic Product) is calculated as: C + I + G + (X-M)
- C = Consumption / Consumer expenditure (spending)
- I = Investments
- G = Government spending (subsidies and welfare payments)
- X = Export
- M = Import
- When the sum of these components is greater, GDP increases.
Importance of Leakages and Injections
- When leakages and injections are equal, the economy is balanced and remains the same.
- When injections are greater than leakages, the economy grows (economic growth).
- When injections are less than leakages, the economy contracts (economic contraction).
Economic Systems
- Australian Political Spectrum is divided into Left and Right
Left vs Right
- Left: Labor, the Greens, emphasizing freedom, equality, fraternity, right, progress, reform, and internationalism
- Right: The Nationals, Liberal, Pauline Hanson's One Nation
Classifying Economic Systems
- 3 criteria used to classify different economic systems:
- Ownership of resources
- Roles of markets and market forces
- Role of Government
Market Economy
- Private ownership of property and resources
- Freedom of enterprise and freedom of choice
- Motivation of individual behavior through self-interest and personal profit
- Price mechanism allocates resources in product and factor markets
- Limited government role in economic life
Planned Economy
- Public ownership of property and resources
- Limited personal and economic resources
- Motivation of individual behavior through collective interest and national goals
- Central planning allocates resources in product and factor markets
- Production largely controlled by state-owned enterprises
- Dominant role of government in economic life
Mixed Market Economies
- Combines aspects of free market and planned economy
- Protects private property and allows economic freedom
- Government interference in economic activities to achieve social aims (e.g., Australia)
Features of Mixed Market Economies
- Private ownership of resources
- Frameworks and regulations (e.g., Australian Consumer Law, Australian Competition & Consumer Commission)
- Public goods provision (e.g., health, education, social welfare)
- Redistribution of income through taxation and social welfare payments (e.g., ATO)
- Government intervention in stabilizing the economy
- Monetary policies and fiscal policies
Green Economy
- Definition: Low carbon, resource efficient, and socially inclusive
- Growth in employment and income driven by public and private investment in low-carbon economic activities and infrastructure
Carbon Tax
- Definition: A fee imposed on the consumption of carbon-based fuels
- Crucial tool to discourage carbon emission and promote cleaner, renewable energy sources
Carbon Tax and Externalities
- A carbon tax works on the principle of externalities
- Reduces emissions by internalizing the cost of negative externalities (environmental harm)
- Encourages firms to invest in environmentally friendly renewable energy and reduces economy-wide reliance on fossil fuels
Environmental and Economic Impacts of Carbon Tax
- Environmental Impact: Reduces greenhouse gas emissions, encourages sustainable practices, and reduces reliance on fossil fuels
- Economic Benefits: Stimulates the growth of the green economy, incentivizes investment in renewable energy, and fosters innovation in sustainable technologies
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Description
Understand the circular flow model, its purpose, and how different sectors interact in a given economy, including the flow of income, money, resources, and output.
