3. A
7. C
8. D
14. A
17. D
20. C
23. E
24. D
27. B
28. E
30. B
Circular flow model definition
The circular flow model presents a simplified picture of how money flows through a market economy, A. There are three important equations that come out of the circular flow model. They come from looking at flows into and out of households, firms and if you choose to think of it this way, financial markets.
I.What equation is related to flows into and out of households?
Y=C
Explain which components flows in and which ones flows out?
Components flowing in include Goods and Services
Components flowing out include Factors of Production such as labor
II.What equation is related to flows into and out of firms?
Y=E=O
Explain which components flows in and which ones flows out?
Components flowing in include Resources
Components flowing out include Output
Circular flow model economics
III.What equation is related to flows into and out of financial intermediaries?
S+T+M=I+G+X
Explain which components flow in and which flow out.
Components that flow in include Investments, Government Spending and Exports
Components that flow out include Savings, Taxation and Imports
Consider an economy in which I= 800, S= 700, T= 500, G= 600 and with M=X.
Using the third equation you found in part A, show that the financial market is not in equilibrium
S+T+M=I+G+X
700+500=800+600
1200<1400
For an economy to be in a state of equilibrium S+T+M must be equal to I+G+X but in this economy S+T+M are less than I+G+X.
