2.5.2 Circular flow of income, expenditure and output

What is the circular flow of income?

The continuous movement of money, goods, and services between households and firms.

What do households provide to firms?

Factors of production (labour, capital).

What do households receive in return?

Wages, rent, dividends.

What do firms provide to households?

Goods and services.

What are withdrawals (leakages)?

Savings, taxes, imports.

What are injections?

Government spending, investment, exports.

When is the economy in equilibrium?

When total injections = total withdrawals.

What happens if net injections > withdrawals?

National output expands.

What happens if net withdrawals > injections?

National output contracts.

Aggregate Demand (AD)

What is AD?

Total demand for goods and services in the economy.

What is the AD formula?

AD = C + I + G + (X-M)

What is consumer spending influenced by?

Disposable income, interest rates, consumer confidence.

What is capital investment influenced by?

Economic growth, business confidence, interest rates, access to credit, government policies.

What is government spending influenced by?

Fiscal policy, economic growth, transfer payments.

What are net exports influenced by?

Real income, exchange rates, world economy, protectionism, non-price competitiveness.

Aggregate Supply (AS)

What causes the SRAS curve to shift inwards?

Higher input costs, higher wages, higher commodity prices, government regulation, lower labour supply, reduced capital investment.

What causes SRAS to shift outwards?

Lower input costs, increased labour productivity, cheaper imports, higher capital investment, improved technology.