Fill in the blank: The circular flow model primarily illustrates the movement of ___ and ___ in an economy.

Money and goods

Explain how the equilibrium level of income is determined in a two-sector model.

Equilibrium income depends on demand.

• Income equals spending.

• Investment drives economic activity.

• Savings must match investments.

True or False: In the circular flow model, households are considered to save and invest directly in production.

False. Households do not engage in saving or investing directly; they provide factors of production and consume goods and services produced by firms.

What is the significance of the marginal propensity to consume (MPC) in determining the investment multiplier?

MPC affects investment multiplier size.

• Higher MPC means larger multiplier.

• Reflects increased income generation.

• Key for economic growth analysis.

Describe the implications of a deflationary gap on employment and output in an economy.

Deflationary gaps decrease employment and output.

• Insufficient demand slows growth.

• Unplanned inventory increases lead to cuts.

• Layoffs result in higher unemployment rates.

Fill in the blank: The relationship between total consumption and total income is expressed through the ___ function.

Consumption

How does the Keynesian model explain the adjustment process when aggregate demand exceeds aggregate supply?

Aggregate demand impacts production levels.

• Increased demand raises output.

• Businesses hire more employees.

• Production adjustments follow shortages.

A) AD = AS

What effect does an increase in government spending have on aggregate demand in the Keynesian framework?

Government spending boosts aggregate demand.

• Stimulates economic growth significantly.

• Increases output through increased investment.

• Influences income via the multiplier effect.

True or False: In a four-sector model, exports are considered leakages from national income.

False. Exports are injections into national income as they represent foreign demand for domestic goods.

Explain how leakages and injections interact in the circular flow of income.

Leakages and injections affect demand.

• Savings reduce total demand.

• Investments boost economic activity.

• Equilibrium balances injections and leakages.

What role does consumer confidence play in influencing the economy during a deflationary gap?

Consumer confidence impacts economic activity.

• Lower confidence reduces spending.

• Exacerbates the deflationary gap.

• Leads to higher unemployment rates.