9708 · 9.1
The circular flow of income flashcards
Revision flashcards for Cambridge 9708 The circular flow of income (syllabus 9.1). Flip, recall, then mark a real past-paper question.
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Withdrawals (leakages) from circular flow?
Savings (S) + Taxation (T) + Imports (M) — income leaving the domestic flow.
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Injections into circular flow?
Investment (I) + Government spending (G) + Exports (X) — spending entering the domestic flow.
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Equilibrium national income condition?
Injections = Withdrawals (I + G + X = S + T + M) — no tendency for Y to change.
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Link circular flow to AD?
AD = C + I + G + (X − M) — components are injections minus import leakage.
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What happens if injections > withdrawals?
National income rises — multiplier process until withdrawals increase enough to match injections.
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Open economy vs closed?
Open adds foreign sector — exports inject, imports withdraw; trade balance (X − M) affects equilibrium Y.
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What is the 'circular flow of income'?
A model of the economy showing the flow of money, goods, and services between key economic agents, primarily households and firms.
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Define a 'withdrawal' in the context of the circular flow.
Any income that is not passed on in the circular flow of income. It is a leakage of spending from the domestic economy. The three withdrawals are Savings (S), Taxation (T), and Imports (M).
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Define an 'injection' in the context of the circular flow.
An addition of spending into the circular flow of income that does not come from households' current income. The three injections are Investment (I), Government Spending (G), and Exports (X).
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What is the condition for equilibrium in the circular flow of income?
The economy is in equilibrium when planned injections equal planned withdrawals. (J = W or I + G + X = S + T + M).
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What happens to national income if injections are greater than withdrawals?
National income, output, and employment will rise. The economy will expand until a new, higher level of equilibrium income is reached.