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VICEconomicsQuick questions
Unit 3: Australia's economic prosperity
Quick questions on The circular flow of income model (VCE Economics Unit 3)
7short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.
What is the circular flow model?Show answer
The circular flow of income is a simplified model of how income, expenditure and output move between the sectors of the economy. It shows that one agent's spending is another agent's income, so the flows circulate continuously.
What are the two key flows?Show answer
The two flows move in opposite directions around the model.
What is equilibrium in the model?Show answer
The economy is in equilibrium when total leakages equal total injections:
What is link to aggregate demand?Show answer
The injections map onto the components of aggregate demand: . A rise in injections (or a fall in leakages) raises AD, which raises real GDP in the short run. This is why monetary and budgetary policy work through the circular flow: they change injections (government spending) and leakages (taxation) or influence private injections and leakages (investment, saving) via interest rates.
What is q1?Show answer
List the three leakages and the three injections in the circular flow model. [2 marks]
What is q2?Show answer
State the condition for equilibrium in the circular flow model. [2 marks]
What is q3?Show answer
Using the circular flow model, explain how a rise in household saving (with injections unchanged) would affect the level of economic activity. [4 marks]
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