9708 · 4.2
Introduction to the circular flow of income flashcards
Revision flashcards for Cambridge 9708 Introduction to the circular flow of income (syllabus 4.2). Flip, recall, then mark a real past-paper question.
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What are injections in the circular flow?
Investment (I), government spending (G), and exports (X) — spending that enters the flow from outside the household–firm loop.
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What are withdrawals (leakages)?
Saving (S), taxation (T), and imports (M) — income that leaves the circular flow without being spent on domestic output.
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Equilibrium national income condition?
Injections = Withdrawals (J = W), or equivalently planned injections equal planned withdrawals — national income is stable.
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What is the multiplier?
The ratio of the final change in national income to the initial injection: k = ΔY ÷ ΔJ. An initial rise in I causes a larger total rise in Y.
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Multiplier formula (simple)?
k = 1 ÷ (1 − MPC) where MPC is marginal propensity to consume, or k = 1 ÷ MPS if saving is the only leakage.
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What happens if J > W?
National income rises — unplanned fall in stocks encourages firms to increase output until J = W again.
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What is the circular flow of income?
A macroeconomic model that illustrates the movement of income, output, and expenditure between key economic agents, primarily households and firms.
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Define 'Withdrawals' from the circular flow and list the three types.
Income that is not passed on in the circular flow of income, reducing spending on domestic goods. The three types are Savings (S), Taxation (T), and Imports (M).
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Define 'Injections' into the circular flow and list the three types.
Additions of spending to the circular flow that do not originate from households' current income. The three types are Investment (I), Government Spending (G), and Exports (X).
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What is the condition for macroeconomic equilibrium in the circular flow model?
Equilibrium occurs when total injections are equal to total withdrawals. The formula is: I + G + X = S + T + M.
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What happens to the level of national income if total withdrawals exceed total injections?
The level of national income will fall. There is a net leakage of spending from the economy, leading to reduced demand for firms' output, causing them to reduce production and income payments.