Five-Sector Circular Flow Model

What does the five-sector circular flow model illustrate?

It illustrates the income flows among households, businesses, government, financial institutions, and the external sector in an economy.

What are the main sectors included in the five-sector circular flow model?

The main sectors are households, businesses, financial sector, government sector, and overseas sector.

Which flows are considered leakages in the circular flow model?

Savings (S), taxes (T), and imports (M) are considered leakages as they reduce the total spending.

What components make up the aggregate demand formula?

Aggregate demand is represented by AD = C + I + G + (X - M),

What impact does a rise in leakages have on aggregate demand?

A rise in leakages relative to injections will cause aggregate demand to fall.

What is the long-term determinant of economic activity according to the model?

The long-term determinant of economic activity is the aggregate supply, which depends on the quality and quantity of available resources.

What is aggregate demand?

Aggregate demand is the total demand for all goods and services in an economy at a given overall price level and in a given period.