The Circular Flow of Income Flashcards

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What is the circular flow of income?

A model that shows how money and goods move between households and firms.

Who are the two main groups in the basic circular flow?

Households and firms.

What do households supply to firms, and what do they receive in return?

They supply labour and other factors. They receive wages, rent, interest and profit.

What do firms supply to households, and what do they receive in return?

They supply goods and services. They receive consumer spending.

What are real flows and money flows in this model?

Real flows are goods, services and factors. Money flows are incomes and spending.

Which three totals are equal in the circular flow?

Total output, total income and total spending are equal.

What is an injection into the circular flow?

New spending added to the flow, such as investment, government spending or exports.

What is a withdrawal (leakage) from the circular flow?

Money leaving the flow, such as saving, taxes or imports.

When is the circular flow in equilibrium?

When injections equal withdrawals, so national income stays the same.

What happens to national income if injections are greater than withdrawals?

It rises. Output and jobs tend to grow.

What happens to national income if withdrawals are greater than injections?

It falls. Output and jobs tend to shrink.

How does the financial sector affect the circular flow?

Banks collect saving and lend to firms. This turns a withdrawal into investment, an injection.