Circular Flow of Income
Identify the 5 sectors of the circular flow of income model
households, firms, financial sector, government sector, overseas sector
Write the macroeconomic equilibrium identity for the full circular flow using S, T, M, I, G, X
S + T + M = I + G + X
State the expenditure approach formula for GDP and define each term briefly
GDP = C + I + G + (X - M);C = consumption, I = investment, G = government purchases, X = exports, M = imports
— List the four main spending categories (C, I, G, X-M) and give one example of each.
C = consumption (groceries), I = investment (new machinery), G = government purchases (school construction), X-M = net exports (iron ore exports minus imports)
Define the circular flow of income in two sentences
Circular flow: a model of flows of resources, goods & services, income and expenditure between households, firms, financial sector, government and overseas. (Accept equivalent concise definitions.)
— Explain in one sentence what macroeconomic disequilibrium means for national income
Disequilibrium: when total injections ≠ total leakages, causing a tendency for income to rise or fall until equilibrium restored.
Explain why only final goods are counted in GDP. Use the wheat–flour–bread example in one concise paragraph
Only final goods counted to avoid double counting; intermediate sales are inputs whose value is included in the final product's price (wheat → flour → bread: count $30 final sale only
Explain how a rise in interest rates typically affects consumption and investment (two brief points).
Higher interest rates → consumption ↓ (higher loan costs, incentive to save); investment ↓ (higher cost of capital).
List the leakages and injections in the 5 sector circular flow of income
leakages - savings, taxation, imports
injections - investment, government spending, exports
If withdrawals exceed injections, what will happen to income and why? Give a two-sentence answer
If withdrawals > injections then demand for goods and services falls → firms cut production → national income decreases until injections rise or withdrawals fall
Identify and explain two types of government expenditures that are included in GDP and one common government payment that is excluded, with reasons
— Included: current expenditures (e.g., teacher salaries), capital expenditures (e.g., new road). Excluded: transfer payments (e.g., unemployment benefits) because they are not payments for current output.
— Classify these transactions as C, I, G, X or M: (a) A student buys a new laptop; (b) A firm buys a new machine; (c) Government pays an unemployment benefit; (d) A tourist from Japan pays for an Australian tour
— (a) C; (b) I; (c) Not included in GDP (transfer payment); (d) X.
Describe what happens to the circular flow when government spending increases but taxes remain the same. Explain the immediate flows that change.
Government spending ↑ (injection) increases demand; firms respond by producing more, increasing income; if taxes unchanged, net injections rise so income expands until new equilibrium
Show how an initial investment increase of $200 and the proportion of income saved is 0.2, can lead to a final change in equilibrium income of $1000. Show the multiplier calculation
$200 / 0.2 = $1000
Given: Consumption = $1,200b, Investment = $300b, Government purchases = $400b, Exports = $250b, Imports = $150b. Calculate GDP using the expenditure approach and show your working
GDP = 1200 + 300 + 400 + (250 − 150) = 2000\text{ (billion)}.
The slides state consumption is about 55% of GDP. Explain why consumption tends to be more stable over time than investment (two short reasons).
— Consumption is essential goods-heavy and tied to stable income; investment is volatile due to expectations and interest-rate sensitivity.