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Circular Flow Questions

The document discusses 14 economic events and identifies which component of the circular flow model (injections or leakages) they are likely to affect and whether they will lead to an expansion or contraction of national income. The events include a fall in manufacturing confidence, a predicted decline in house prices, an increase in the value of the pound, a public sector pay freeze, a reduction in Chinese import tariffs on British steel, predicted higher unemployment, an extension of a car scrappage scheme, predicted growth in global trade, increased government road building spending, falling consumer prices and expectations of further declines, an increase in interest rates by the Bank of England, a new higher income tax rate, increased spending on welfare payments financed by higher taxes on

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236 views2 pages

Circular Flow Questions

The document discusses 14 economic events and identifies which component of the circular flow model (injections or leakages) they are likely to affect and whether they will lead to an expansion or contraction of national income. The events include a fall in manufacturing confidence, a predicted decline in house prices, an increase in the value of the pound, a public sector pay freeze, a reduction in Chinese import tariffs on British steel, predicted higher unemployment, an extension of a car scrappage scheme, predicted growth in global trade, increased government road building spending, falling consumer prices and expectations of further declines, an increase in interest rates by the Bank of England, a new higher income tax rate, increased spending on welfare payments financed by higher taxes on

Uploaded by

sil
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© © All Rights Reserved
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We have looked at the basic circular flow of income and spending that illustrates the macroeconomy.

Changes in the components in this model can lead to changes in


the level of a countrys national income. In the exercise below, consider whether the economic event that is described will lead either to a change in an injection
/leakage and whether the effect is likely to cause an expansion () or a contraction () in the level of national income. For each example, assume ceteris paribus

Economic event Which injection or leakage is/are On balance - what is the likely effect
likely to be most affected? on the level of GDP expansion or
X, I, G, S, M T contraction (circle your answer)

1. A survey finds a fall in confidence for UK manufacturing firms X G I S M T () Expansion / Contraction ()

2. A property survey finds that homeowners expect average X G I S M T () Expansion / Contraction ()


house prices to fall by another 5% in 2010

3. The pound rises in value by 10% against the US dollar X G I S M T () Expansion / Contraction ()

4. The government decides to freeze the pay of people working X G I S M T () Expansion / Contraction ()
for local councils at a time when price inflation is 3%

5. China announces a reduction in the size of an import tariff on X G I S M T () Expansion / Contraction ()


British-made steel

6. The CBI predicts that continued job losses will see X G I S M T () Expansion / Contraction ()
unemployment peak at close to 3 million in 2011

7. The government extends a car scrappage scheme for people X G I S M T () Expansion / Contraction ()
buying vehicles more than nine years old

8. The IMF predicts that world economic growth will rebound in X G I S M T () Expansion / Contraction ()
2011 with an increase in global trade

9. The government decides to increase the UK road-building X G I S M T () Expansion / Contraction ()


programme by 500m for 2010-11
10. The prices of many consumer goods and services start to fall, X G I S M T () Expansion / Contraction ()
and people start to expect further price reductions in the future

11. The Bank of Englands Monetary Policy Committee decides to X G I S M T () Expansion / Contraction ()
raise official interest rates from 0.5% to 2% over a period of
months

12. The government introduces a new higher rate of income tax of X G I S M T () Expansion / Contraction ()
50% for people with annual incomes of more than 150,000

13. The government increases revenues from taxes on high-income X G I S M T () Expansion / Contraction ()
earners by 2bn and uses the money to increase spending on
welfare payments to low-income families at 2bn

14. To reduce the size of the budget deficit, the government X G I S M T () Expansion / Contraction ()
increases VAT from 17.5% to 20%

15. Improvements in the level of labour productivity causes lower X G I S M T () Expansion / Contraction ()
costs and increased profits for car producers located in the UK.

16. The Chancellor announces a reduction in the rate of national X G I S M T () Expansion / Contraction ()
insurance contributions paid on new employees by smaller
businesses

Key summary points for your notes

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