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What is the Circular Flow Model?
Illustrates how money, goods, and services move through the economy between households and firms.
What is the Product Market?
Where goods and services are bought and sold; consumers demand, firms supply.
What is the Factor Market?
Where resources like labor, capital, and land are exchanged; firms demand, consumers supply.
What is Gross Domestic Product (GDP)?
The total dollar value of all final goods and services produced within a country's borders in one year.
What is Consumer Spending (C)?
Purchases by households (e.g., pizza, haircuts).
What is Investment Spending (I)?
Purchases by businesses (e.g., machinery, tools).
What is Government Spending (G)?
Purchases by the government (e.g., roads, military).
What are Net Exports (Xn)?
Exports minus imports.
What are Wages (W)?
Income from labor.
What is Interest (i)?
Payments for the use of capital.
What is the impact of increased government spending on GDP?
Increased government spending directly increases GDP through the expenditure approach (GDP = C + I + G + Xn).
What is the impact of a tax cut on consumer spending and GDP?
A tax cut typically increases disposable income, leading to higher consumer spending and, consequently, a higher GDP.
What is the impact of increased exports on a country's GDP?
Increased exports directly increase net exports (Xn), leading to a higher GDP.
What is the impact of increased imports on a country's GDP?
Increased imports decrease net exports (Xn), leading to a lower GDP.
How would subsidies to businesses for capital investment impact GDP?
Subsidies would increase investment spending (I), leading to a higher GDP.
How would increased infrastructure spending by the government affect GDP?
It would increase government spending (G), leading to a higher GDP.
What is the impact of increased unemployment benefits on GDP?
Unemployment benefits are transfer payments and are not directly included in GDP. However, they can indirectly support consumer spending.
How does a decrease in interest rates affect investment spending and GDP?
Lower interest rates typically encourage businesses to increase investment spending (I), leading to a higher GDP.
What is the effect of tariffs on imports and their subsequent impact on GDP?
Tariffs can decrease imports, potentially increasing net exports (Xn) and GDP, but may also lead to retaliatory tariffs.
How would policies promoting domestic production over imports impact GDP?
Such policies aim to increase net exports (Xn), leading to a higher GDP, but may also lead to trade imbalances.
How does the circular flow model illustrate voluntary exchange?
It shows how households and firms engage in mutually beneficial transactions in the product and factor markets, each aiming to maximize their benefit.
How does an increase in consumer spending impact the circular flow?
Increased consumer spending increases revenue for firms, leading to increased demand for resources in the factor market and higher household income.
How does the expenditure approach calculate GDP?
GDP is calculated by summing consumer spending (C), investment spending (I), government spending (G), and net exports (Xn).
How does the income approach calculate GDP?
GDP is calculated by summing wages (W), interest (i), rents (r), and profits (p).
Why are intermediate goods not included in GDP?
To avoid double-counting, as their value is already included in the final goods and services.
Why are transfer payments excluded from government spending in GDP?
Because they do not represent the purchase of new goods or services.
How does an increase in exports affect GDP?
An increase in exports increases net exports (Xn), leading to a higher GDP.
How does an increase in imports affect GDP?
An increase in imports decreases net exports (Xn), leading to a lower GDP.
How would the purchase of new machinery by a company affect GDP?
It would increase investment spending (I), leading to a higher GDP.
How would increased government spending on road construction affect GDP?
It would increase government spending (G), leading to a higher GDP.