Economics Flashcards: Circular-Flow Model

What does a circular-flow diagram help to explain?

In the simple circular-flow diagram, households are the only decision makers.

In the markets for what do households act as sellers and firms as buyers?

What principle does the production possibilities frontier illustrate?

Which assumption is not made when constructing a production possibilities frontier?

Which department provides tax policy advice to the president of the United States?

Which government office helps formulate spending plans and regulatory policies?

Why do economists sometimes give conflicting advice?

What do Tao and Miray disagree on regarding tax policy?

Circular-Flow Diagram

A circular-flow diagram models interactions between consumers, the government, firms, and households to explain economic organization.
Households are not the only decision makers; firms also play a significant role.

Markets in Circular-Flow

In the factors of production market, households are sellers while firms are buyers.
In the goods and services market, both households and firms are involved as sellers and buyers.

Production Possibilities Frontier (PPF)

The PPF illustrates the concept that people face trade-offs in decision-making.
Key assumptions of constructing a PPF include a country producing only two goods and the absence of changes in resource availability or technology.

Tax Policy Advice

The U.S. president receives tax policy advice primarily from the Department of the Treasury.
The Office of Management and Budget assists in formulating spending plans and regulatory policies.

Conflicting Economic Advice

Economists may provide conflicting advice due to differing values and scientific judgments.
Normative views on tax policy can lead to disagreements, as seen with economists Tao and Miray who have opposing thoughts on taxation fairness based on wealth.

This quiz provides key terms and definitions related to the circular-flow model in economics, focusing on how the economy is structured and the roles of different actors such as households and governments. Perfect for students looking to enhance their understanding of economic principles and interactions.