Podcast
Questions and Answers
What is the role of households in a two-sector economy?
What is the role of households in a two-sector economy?
- To supply resources to firms in exchange for payments (correct)
- To provide goods and services to firms
- To manage the production processes of firms
- To regulate the price of goods and services
In a three-sector economy, which new entity is introduced into the circular flow of income model?
In a three-sector economy, which new entity is introduced into the circular flow of income model?
- Foreign investors
- Non-profit organizations
- Government (correct)
- International trade partners
What do firms receive from households in exchange for goods and services in a two-sector economy?
What do firms receive from households in exchange for goods and services in a two-sector economy?
- Transfer payments
- Subsidies and grants
- Revenue (correct)
- Loans and credits
What type of payments do households provide to the government in a three-sector economy?
What type of payments do households provide to the government in a three-sector economy?
What is a primary function of businesses in a three-sector economy?
What is a primary function of businesses in a three-sector economy?
How do households benefit from providing factors of production to firms?
How do households benefit from providing factors of production to firms?
In what way does spending by households circulate money back to firms in a two-sector economy?
In what way does spending by households circulate money back to firms in a two-sector economy?
Which of the following is NOT a payment that firms make to households in a circular flow of income?
Which of the following is NOT a payment that firms make to households in a circular flow of income?
What does the average propensity to consume (APC) measure?
What does the average propensity to consume (APC) measure?
How is the marginal propensity to consume (MPC) calculated?
How is the marginal propensity to consume (MPC) calculated?
What is defined as the excess of income over consumption expenditure?
What is defined as the excess of income over consumption expenditure?
Which function expresses the relationship between saving and the level of income?
Which function expresses the relationship between saving and the level of income?
What happens to saving as the level of income increases?
What happens to saving as the level of income increases?
What does the relationship S = f(Y) represent?
What does the relationship S = f(Y) represent?
Which of the following correctly describes the marginal propensity to consume (MPC)?
Which of the following correctly describes the marginal propensity to consume (MPC)?
Which statement about savings is NOT true?
Which statement about savings is NOT true?
What happens during unplanned investment when businesses accumulate more inventory than planned?
What happens during unplanned investment when businesses accumulate more inventory than planned?
Which of the following represents the correct equilibrium condition in the Simple Keynesian Model?
Which of the following represents the correct equilibrium condition in the Simple Keynesian Model?
What do MPC and MPS add up to in economic theory?
What do MPC and MPS add up to in economic theory?
Which of the following correctly defines Aggregate Demand (AD)?
Which of the following correctly defines Aggregate Demand (AD)?
In the Simple Keynesian Model, what is primarily used to determine national income?
In the Simple Keynesian Model, what is primarily used to determine national income?
What does the consumption function describe in the context of the Simple Keynesian Model?
What does the consumption function describe in the context of the Simple Keynesian Model?
Which component is not included in the definition of Aggregate Demand (AD)?
Which component is not included in the definition of Aggregate Demand (AD)?
What may influence investment levels in an economy?
What may influence investment levels in an economy?
What is the balanced budget multiplier in Keynesian economics?
What is the balanced budget multiplier in Keynesian economics?
How does an increase in government spending affect national income?
How does an increase in government spending affect national income?
What function of money refers to its ability to express the value of goods and services?
What function of money refers to its ability to express the value of goods and services?
In what form can money exist?
In what form can money exist?
What is the primary benefit of money as a medium of exchange?
What is the primary benefit of money as a medium of exchange?
What effect does an increase in taxes have on disposable income?
What effect does an increase in taxes have on disposable income?
Which function of money allows individuals to store purchasing power over time?
Which function of money allows individuals to store purchasing power over time?
What is the significance of a balanced budget in Keynesian economics?
What is the significance of a balanced budget in Keynesian economics?
What is one of the primary aims of the government budget?
What is one of the primary aims of the government budget?
Which function of the government budget involves directing funds towards priority areas?
Which function of the government budget involves directing funds towards priority areas?
How does the government budget help in implementing fiscal policy?
How does the government budget help in implementing fiscal policy?
In what way does the government budget aid income redistribution?
In what way does the government budget aid income redistribution?
What role does accountability and transparency play in the government budget process?
What role does accountability and transparency play in the government budget process?
Which of the following is NOT a function of the government budget?
Which of the following is NOT a function of the government budget?
Which of the following best describes the relationship between the budget and economic planning?
Which of the following best describes the relationship between the budget and economic planning?
Why is debt management an important aspect of fiscal discipline within the budget?
Why is debt management an important aspect of fiscal discipline within the budget?
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Study Notes
Circular Flow of Income in a Two-Sector Economy
- The model includes households and firms, with money flowing between them.
- Households provide factors of production (labor, capital) to firms for payments (wages, rent, interest).
- Firms produce goods and services sold to households, generating revenue.
- Households spend income on goods/services, which becomes revenue for firms, completing the cycle.
Circular Flow of Income in a Three-Sector Economy
- Expanded model includes the government, detailing interactions between households, businesses, and government.
- Households are primary consumers and owners of production factors, earning income and paying taxes.
- Businesses produce goods/services using household-supplied factors and pay households for their contributions.
- Government collects taxes from households and provides transfer payments like social security.
Propensity of Consumption
- Average Propensity to Consume (APC): Ratio of total consumption to total income; calculated as APC = C/Y.
- Marginal Propensity to Consume (MPC): Fraction of additional income that goes to consumption; calculated as MPC = ΔC/ΔY.
Saving Function
- Saving is the income leftover after consumption; it generally increases with income.
- The saving function (S = f(Y)) reflects the relationship between saving and income levels.
- Influenced by factors like interest rates and economic forecasts.
Unplanned Investment
- Refers to inventory changes when actual investment differs from planned; can cause unplanned inventory buildup or reduction.
Simple Keynesian Model of National Income Determination
- Basic components: Aggregate Demand (AD = C + I + G + NX) and Aggregate Supply (AS).
- Equilibrium occurs when national income equals aggregate demand.
- Consumption function determines how spending changes with income.
Balanced Budget Multiplier
- Formula for the balanced budget multiplier: ΔY/ΔG - ΔY/ΔT = 1.
- An increase in government spending raises aggregate demand, while a corresponding tax increase reduces disposable income, causing a net increase in national income.
Meaning and Functions of Money
- Money serves as a medium of exchange, unit of account, and store of value, facilitating transactions and valuing goods/services.
- Various forms include coins, banknotes, and digital balances.
Functions of Government Budget
- Economic planning and control to manage growth and inflation.
- Resource allocation to prioritize spending for sectors like health and education.
- Fiscal policy tool for adjusting taxes and expenditure to influence economic conditions.
- Helps redistribute income through social programs.
- Promotes accountability and transparency in government financial decisions.
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