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CH 1 : Circular Flow
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CH 1 : Circular Flow

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Questions and Answers

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?

    <p>Real Flows</p> Signup and view all the answers

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

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

    Which market deals in resources like labor and capital?

    <p>Factor Market</p> Signup and view all the answers

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

    <p>Collects taxes and injects spending into the economy</p> Signup and view all the answers

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

    <p>Basic, Factor Cost, and Market Prices</p> Signup and view all the answers

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

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

    What is the multiplier effect?

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

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

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

    What is the purpose of the Two-Sector Model?

    <p>To analyze household and firm interactions</p> 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?

    <p>Taxes add complexity to the spending and saving behaviors</p> Signup and view all the answers

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

    <p>Marginal Propensity to Consume (MPC)</p> Signup and view all the answers

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

    <p>A significant increase in economic output</p> Signup and view all the answers

    What does GNI account for?

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

    Which model focuses on household and firm interactions?

    <p>Two-Sector Model</p> Signup and view all the answers

    What affects spending adjustments in the Two-Sector Model?

    <p>Marginal Propensities to Consume (MPC) and Save (MPS)</p> Signup and view all the answers

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

    <p>The inclusion of foreign transactions</p> Signup and view all the answers

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

    <p>To reflect different economic approaches</p> Signup and view all the answers

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

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

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

    <p>They decrease the multiplier effect</p> Signup and view all the answers

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

    <p>As MPC increases, the multiplier increases</p> Signup and view all the answers

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

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

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

    <p>To handle the trading of currencies necessary for international trade</p> Signup and view all the answers

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

    <p>Government</p> Signup and view all the answers

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

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

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

    <p>Goods Market</p> Signup and view all the answers

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

    <p>To measure the economic performance through metrics like GDP and GNI</p> Signup and view all the answers

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

    <p>The amplification of economic activity through additional spending</p> Signup and view all the answers

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

    <p>To account for income earned by domestic residents</p> Signup and view all the answers

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

    <p>Factor Cost</p> Signup and view all the answers

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

    <p>The multiplier increases</p> Signup and view all the answers

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

    <p>The inclusion of government and foreign transactions</p> 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?

    <p>Households decrease their spending and increase their saving</p> Signup and view all the answers

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

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

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

    <p>MPC + MPS = 1</p> Signup and view all the answers

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

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

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

    <p>Economic growth and development</p> Signup and view all the answers

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

    <p>To collect taxes and inject spending into the economy</p> Signup and view all the answers

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

    <p>To trade consumer goods and services</p> Signup and view all the answers

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

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

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

    <p>They add to the economic flow</p> Signup and view all the answers

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

    <p>To manage the flow of money and provide savings and investments</p> Signup and view all the answers

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

    <p>To provide labor and resources, receiving income</p> Signup and view all the answers

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