CH 1 : Circular Flow

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Which sector provides labor and resources in the circular flow model?

Households (correct)

Foreign Sector

Firms

Government

What is the main function of the financial market in the circular flow model?

Deals in resources like labor and capital

Handles the trading of currencies

Trades consumer goods and services

Manages the flow of money, including savings and investments (correct)

What measures the total economic output at market prices?

National Income

GDP (Gross Domestic Product) (correct)

GNP (Gross National Product)

Net Domestic Product

What type of flows involve the movement of goods and services?

Real Flows Signup and view all the answers

What is Gross National Income (GNI) a measure of?

Income earned by a country's residents, including income from abroad Signup and view all the answers

Which market deals in resources like labor and capital?

Factor Market Signup and view all the answers

What is the role of the government in the circular flow model?

Collects taxes and injects spending into the economy Signup and view all the answers

What are the three categories of prices based on economic approach?

Basic, Factor Cost, and Market Prices Signup and view all the answers

What is the main function of the foreign sector in the circular flow model?

Involves trade activities, where exports add to the economic flow and imports lead to outflows of currency Signup and view all the answers

What is the multiplier effect?

An initial increase in spending that leads to a more significant overall increase in economic output Signup and view all the answers

What is the basic formula for the multiplier in a simple two-sector model?

k = 1 / (1 - MPC) Signup and view all the answers

What is the purpose of the Two-Sector Model?

To analyze household and firm interactions Signup and view all the answers

What is the impact of taxes on the spending and saving behaviors in the Three and Four-Sector Models?

Taxes add complexity to the spending and saving behaviors Signup and view all the answers

What is the term for the proportion of additional income that households spend?

Marginal Propensity to Consume (MPC) Signup and view all the answers

What is the impact of the multiplier effect on economic output?

A significant increase in economic output Signup and view all the answers

What does GNI account for?

All income earned by a country's residents, including abroad Signup and view all the answers

Which model focuses on household and firm interactions?

Two-Sector Model Signup and view all the answers

What affects spending adjustments in the Two-Sector Model?

Marginal Propensities to Consume (MPC) and Save (MPS) Signup and view all the answers

What is the main difference between the Two-Sector Model and the Three-Sector Model?

The inclusion of foreign transactions Signup and view all the answers

What is the purpose of using different price categories in economics?

To reflect different economic approaches Signup and view all the answers

What is the formula for the multiplier in a simple two-sector model?

k = 1 / (1 - MPC) Signup and view all the answers

How do imports affect the multiplier effect in the Three-Sector Model?

They decrease the multiplier effect Signup and view all the answers

What is the relationship between the marginal propensity to consume and the multiplier?

As MPC increases, the multiplier increases Signup and view all the answers

What is the primary focus of the circular flow model in an open economy?

To describe the economic activities among various sectors and their interactions through markets Signup and view all the answers

What is the main function of the foreign exchange market in the circular flow model?

To handle the trading of currencies necessary for international trade Signup and view all the answers

Which sector injects spending into the economy through public services and infrastructure in the circular flow model?

Government Signup and view all the answers

What is the main difference between real flows and money flows in the circular flow model?

Real flows involve the movement of goods and services, while money flows represent the financial transactions Signup and view all the answers

Which market facilitates the trade of consumer goods and services in the circular flow model?

Goods Market Signup and view all the answers

What is the primary purpose of measuring national account aggregates in the circular flow model?

To measure the economic performance through metrics like GDP and GNI Signup and view all the answers

What is the outcome of the interactions among various sectors and markets in the circular flow model?

The amplification of economic activity through additional spending Signup and view all the answers

What is the primary reason for adjusting Gross National Income for income received from abroad?

To account for income earned by domestic residents Signup and view all the answers

Which of the following prices is closest to the market price of a good?

Factor Cost Signup and view all the answers

What is the impact of an increase in the marginal propensity to consume on the multiplier?

The multiplier increases Signup and view all the answers

What is the primary difference between the Two-Sector Model and the Three-Sector Model?

The inclusion of government and foreign transactions Signup and view all the answers

What is the effect of an increase in taxes on the spending and saving behaviors in the Three-Sector Model?

Households decrease their spending and increase their saving Signup and view all the answers

What is the primary purpose of the multiplier effect in macroeconomic analysis?

To reveal how initial increases in spending lead to a more significant overall increase in economic output Signup and view all the answers

What is the relationship between the marginal propensity to consume and the marginal propensity to save?

MPC + MPS = 1 Signup and view all the answers

What is the primary advantage of using the Two-Sector Model in macroeconomic analysis?

It provides a simplified framework for understanding household and firm interactions Signup and view all the answers

What is the primary outcome of the interactions among various sectors and markets in the circular flow model?

Economic growth and development Signup and view all the answers

What is the main reason for the government's involvement in the circular flow model?

To collect taxes and inject spending into the economy Signup and view all the answers

What is the primary function of the goods market in the circular flow model?

To trade consumer goods and services Signup and view all the answers

What is the primary difference between real flows and money flows in the circular flow model?

Real flows are goods and services, while money flows are financial transactions Signup and view all the answers

What is the primary impact of exports on the circular flow model?

They add to the economic flow Signup and view all the answers

What is the primary function of the financial market in the circular flow model?

To manage the flow of money and provide savings and investments Signup and view all the answers

What is the primary role of households in the circular flow model?

To provide labor and resources, receiving income Signup and view all the answers