Economics Circular Flow Equilibrium Quiz

The real sector refers to the production and consumption of goods and services in an economy.

The equilibrium in the real sector occurs when the supply of goods by firms matches the demand for those goods by households.

Leakages represent funds leaving the circular flow of income, such as savings, while injections are funds entering the flow, such as investment.

The equilibrium condition for the real sector is when savings (S) by households equal investment (I) by firms.

Higher income generally leads to higher savings, as households have more disposable income.

A higher interest rate encourages saving, as savers earn more on their deposits.

Lower interest rates encourage investment, as businesses can borrow money more cheaply.

Higher income can stimulate investment, as businesses anticipate increased demand for their products.

Government programs that provide financial assistance to individuals, such as welfare, unemployment insurance, Medicare, Medicaid, and Social Security.

Government programs that benefit corporations, often through tax breaks or subsidies. They can counteract the effects of other transfer programs that help individuals.

Goods and services available to everyone, regardless of their ability to pay. They are typically provided by the government and can improve income distribution.

A type of taxation where individuals with higher incomes pay a larger percentage of their income in taxes. This can help reduce income inequality.

The use of interest rates to influence economic activity. Tight monetary policy, with higher interest rates, can lead to unemployment and favor creditors over debtors.

The overall size of the economy. Expansive monetary policy can increase the scale of economic activity.

Government spending and taxation policies used to influence the economy. Fiscal policy has more flexibility than monetary policy in terms of how it can be used to influence economic goals.

A simplified model of the economy that shows the relationship between interest rates, output, and the demand for money. It helps to understand how monetary and fiscal policies can influence the economy.

The relationship between the interest rate and the quantity of money demanded, where a higher interest rate leads to a lower demand for money. This is because people are more willing to hold interest-bearing assets (e.g., bonds) when interest rates are higher, leading to less demand for liquid money.

A graphical representation of the equilibrium in the money market, where the supply of money equals the demand for money. It shows the relationship between the interest rate and the level of output (income) in the economy.

An increase in the supply of money, leading to a decrease in the interest rate and an increase in the demand for money. This is because excess money is used to buy bonds, driving up their price and lowering the interest rate.

A decrease in the supply of money, leading to an increase in the interest rate and a decrease in the demand for money. This happens because there is less money available, which drives down the price of bonds and increases the interest rate.

The tendency for bond prices to rise when the supply of money increases. This is because there is more money available to buy bonds, which drives up their price and lowers the interest rate.

The process by which the money market reaches equilibrium. When the supply of money exceeds the demand for money (M > L), excess money is used to buy bonds, driving up their prices and lowering the interest rate. Conversely, when the demand for money exceeds the supply of money (M < L), people sell bonds, driving down prices and raising the interest rate.

The opportunity cost of holding cash is the potential return that could be earned by investing the cash instead. When interest rates are high, the opportunity cost of holding cash is higher, leading to a lower demand for money.

A decrease in the interest rate can stimulate investment spending, leading to economic growth. This further stimulates the demand for money. The result is a new equilibrium at lower interest rates and higher income.

The concept that the market price of natural resources doesn't accurately reflect their true value, leading to overexploitation and potential harm to the environment.

The total amount of materials extracted and used in a given period, a key factor in measuring environmental impact.

The relationship between the amount of goods produced (GDP) and the amount of material used (throughput), representing efficiency in resource usage.

A policy approach to control environmental impact by setting a fixed limit on the total amount of resource use.

The economic model that considers both real (production, consumption) and monetary (money supply, interest rates) factors.

A standard economic model used for analyzing monetary and fiscal policy actions.

The situation where increased government spending crowds out private investment due to rising interest rates.

The macroeconomic equilibrium where the IS and LM curves intersect, representing the intersection of goods and money market equilibrium.

The Federal Open Market Committee (FOMC) is responsible for setting monetary policy in the United States. It meets approximately eight times per year to make decisions about interest rates and the money supply.

The time it takes for a policy decision to be made and implemented is the decision-making lag. The time it takes for the policy to take effect in the economy is the implementation lag.

The delay between a policy decision and its full impact on the economy can be significant, making it difficult to accurately predict the effects of monetary policy.

Disagreements exist about the best approach to monetary policy, including which target (money supply or interest rates) should be manipulated. There are challenges in achieving both targets effectively.

The Federal Reserve (Fed) commonly aims to control either the money supply or interest rates. These are two primary tools for influencing economic activity.

The Fed faces difficulties in precisely defining and controlling the money supply because the definition of money is evolving and complex.

Psychological factors can influence bond market behavior and affect interest rates. Investor expectations of future inflation significantly influence the prices of bonds.

Bond markets are influenced by investors' expectations of future inflation, which in turn affects interest rates. This complex relationship makes it challenging to control interest rates precisely.

Assuming the real sector keeps producing real output but uses up natural resources unsustainably. It implies that we're counting capital consumption as income, leading to a depletion of natural capital.

The idea that we can achieve economic growth by consuming natural capital, leading to environmental degradation and ultimately pushing the economy beyond its sustainable boundaries.

A situation where economic equilibrium (where supply and demand meet) coincides with biophysical equilibrium (where resource use is sustainable). It is a hypothetical state where our economic activity doesn't deplete natural resources.

The assumption that advancements in technology and knowledge will somehow compensate for the depletion of natural resources, leading to a continued economic growth.

The non-accelerating inflation rate of unemployment (NAIRU) is the level of unemployment that does not lead to inflation. It assumes that pushing beyond full employment would lead to inflation. However, this doesn't consider the impact of exceeding the natural capital limit.

A situation where the economic growth surpasses the ecological constraints, depleting natural resources and leading to environmental degradation, ultimately jeopardizing long-term economic stability.

The shift in economic activity away from resource-intensive sectors like fossil fuels and towards labor-intensive, sustainable activities.

A situation where the desire for economic growth outweighs environmental sustainability, pushing us towards ecological limits and potential ecological crisis.