Lesson 4.2.2.1

4.2.2.1 The circular flow of income Quiz: AQA Economics, Unit 2

20 questions

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Lesson 4.2.2.1, The circular flow of income: 20 multiple choice questions for the AQA Economics (7136), Unit 2: The national and international economy, written with Revision Ninja.

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The 20 questions

  1. Which of these is an injection into the circular flow of income?

    • Government spending on public services, which adds to the flow of expenditure on domestic output in the economy.
    • Saving by households placed in banks, which withdraws income from the circular flow of income in the period.
    • Imports of goods bought from abroad, which leak money out of the domestic circular flow of income in the year.
    • Taxes paid by households to the government, which reduce the income available for spending in the economy in the case described.

  2. Which of these is a withdrawal (leakage) from the circular flow of income?

    • Exports of goods sold to buyers in foreign countries, which bring money into the domestic economy from abroad.
    • Imports of goods and services bought from abroad by domestic households and firms in the period.
    • Government spending on infrastructure, which adds directly to the incomes of firms that win contracts in the period.
    • Investment by firms in new capital equipment, which increases the flow of spending on domestic output in the year.

  3. Which identity holds in the circular flow of income?

    • Income equals expenditure minus saving, since households spend only what they do not save in every period of time.
    • Income equals output equals expenditure, since every payment made is income to someone in the economy.
    • Expenditure equals output minus imports, since imports are the only item counted in the expenditure measure of GDP.
    • Output equals income minus taxes, since taxes are the only deduction from income in the economy in any period.

  4. Nominal income rises from £60,000 to £66,000 while prices rise by 10 per cent. What happens to real income?

    • Real income rises to £72,600, since 66,000 is multiplied by 1.10 to adjust for the change in prices over the year.
    • Real income falls to £54,000, since the price rise reduces income by 10 per cent in the period under study.
    • Real income rises to £66,000, since prices do not affect the value of income in the economy in any period at all.
    • Real income is unchanged at £60,000, since 66,000 divided by 1.10 equals 60,000.

  5. Equilibrium national income occurs when:

    • Injections equal withdrawals, so there is no tendency for national income to rise or fall in the circular flow.
    • Government spending equals taxation, so the government budget is balanced in the year concerned in the economy.
    • Exports equal imports, so the current account of the balance of payments is in balance at that level of income.
    • Output equals the full employment level, so the economy has no unemployment of any kind at any time in the period.

  6. Full employment national income refers to:

    • The level of income at which unemployment is zero in every sector of the economy, including the informal sector.
    • The level of income reached in a recession, when unemployment is at its highest level for the whole of the business cycle.
    • The level of income the economy produces when all of its resources, including labour, are fully employed.
    • The level of income at which all households save exactly the same amount, so that saving equals investment in the economy.

  7. An increase in investment, with no change in withdrawals, will:

    • Raise equilibrium national income, through the multiplier effect on later rounds of spending in the economy.
    • Reduce equilibrium national income, because investment withdraws money from the circular flow of income in every period.
    • Reduce the price level only, with no effect on the level of national income in the economy at any time in the period.
    • Leave equilibrium national income unchanged, because injections do not affect the level of spending in the economy at all.

  8. An increase in the marginal propensity to save reduces national income because:

    • Saving raises the level of spending on goods and services, so output increases as households hold more money in the bank.
    • Savings add directly to the flow of income in the economy, so national income rises with higher saving in every case.
    • Withdrawals rise, which reduces the flow of spending on domestic output in each round of the circular flow.
    • Saving has no effect on the circular flow, because money saved is always returned to households in the same period.

  9. Injections are £120 billion and withdrawals are £100 billion. What will happen to national income?

    • Income is in equilibrium, because injections and withdrawals are both positive values in the same period in the economy.
    • Injections exceed withdrawals, so national income will tend to rise until the two are equal again.
    • Withdrawals exceed injections, so national income will tend to rise until the two sides of the flow are equal again.
    • National income will fall to zero, because injections exceeding withdrawals always reduce the circular flow in the economy.

  10. Why is real national income used as an indicator of economic performance?

    • It includes only the income of government, so that changes reflect the performance of the public sector in the economy.
    • It removes the effect of inflation, so that changes reflect real growth in the output produced by the economy.
    • It adds the effect of inflation to nominal income, so that changes reflect the growth in prices across the economy.
    • It measures the total stock of wealth, so that changes reflect the accumulation of assets by households over time.

  11. What does the circular flow of income concept describe?

    • How income, output and expenditure flow between households and firms, with money continuously circulating through the economy.
    • How a country's trade balance is calculated, using only the exports and imports of goods in each period.
    • How prices rise through the year as wages increase faster than output in every sector of the economy under the conditions described.
    • How money is stored in a single bank account, so that its value remains fixed in the economy over time.

  12. Consumption is £300bn, investment £80bn, government spending £100bn, exports £120bn and imports £110bn. What is GDP by expenditure?

    • £490bn, since 300 + 80 + 100 + (120 minus 110) gives 490.
    • £600bn, since exports are counted in full and imports are simply ignored in the expenditure calculation for the year.
    • £710bn, since imports are added to the other components of expenditure to give total national spending in the year.
    • £400bn, since government spending and exports are excluded from the total of national expenditure in the period.

  13. Nominal GDP is £2,200bn in year 2, and prices rise by 5 per cent from the base year. What is real GDP in year 2?

    • £2,090bn, since 2,200 minus 5 per cent of 2,200 gives the real output of the economy after removing the price effect.
    • £2,310bn, since 2,200 multiplied by 1.05 gives the real output of the economy in the second year of the series.
    • About £2,095bn, since 2,200 divided by 1.05 removes the 5 per cent rise in prices.
    • £2,200bn, since nominal and real GDP differ only in the base year of the series in every period of time.

  14. Which evaluation best reflects the value of the circular flow model?

    • It is a complete and exact description of all economic activity, so its predictions are always accurate in every period of time.
    • It shows the interdependence of households and firms, but it simplifies the economy by omitting factors such as time lags and expectations.
    • It shows that households never interact with firms, so the circular flow has no economic meaning at all in practice.
    • It is useful only for measuring the price level, so it has no role in analysing income or expenditure in the economy.

  15. Why is saving a withdrawal from the circular flow of income, but not necessarily a permanent loss to the economy?

    • Saved funds are always destroyed by banks, so they never return to the circular flow of income in any future period of time.
    • Saved funds are lent to firms through banks and may be spent on investment, so they can return to the flow as an injection.
    • Saved funds are taxed at 100 per cent by the government, so they always become government spending in the same period.
    • Saved funds are returned to households as cash at the end of each day, so they never leave the flow of income at all.

  16. Full employment income is £800bn and actual income is £740bn. What is the output gap?

    • £800bn below full employment, since the full employment level is the total of actual income and potential income combined.
    • £60bn below full employment, indicating spare capacity and unemployment in the economy.
    • £60bn above full employment, indicating that the economy is producing beyond its normal capacity in the period concerned.
    • £740bn above full employment, since actual income is always the difference between actual and full employment income.

  17. An increase in exports will most directly affect the circular flow by:

    • Leaving the flow unchanged, because exports are a withdrawal that cancels out with imports in every period of time.
    • Reducing an injection, which reduces the flow of expenditure on domestic output and tends to lower national income.
    • Raising a withdrawal, which reduces the flow of expenditure on domestic output and tends to lower national income.
    • Raising an injection, which adds to the flow of expenditure on domestic output and tends to raise national income.

  18. Why might an increase in injections fail to raise real national income in the short run?

    • Injections never affect national income, because all money spent is always saved in the banking system in every period.
    • Resources may already be fully employed, so higher spending mainly raises prices rather than output.
    • Injections only raise the price level and never change real national income in any circumstances at all in the economy.
    • Injections always reduce output, because they increase withdrawals in the same period in the economy.

  19. A country has income of £20,000 per person in equilibrium and a population of 1 million. What is national income?

    • £2 billion, since £20,000 divided by 10 million people gives the national income in the economy in the year.
    • £20 billion, since £20,000 multiplied by 1 million people gives the total national income.
    • £200 billion, since £20,000 multiplied by 10 million people gives the national income for the year in question.
    • £20,000, since national income is the same as income per person in every economy at any time in the period.

  20. Which statement about the three measures of national income is correct?

    • They should give the same value in principle, because each payment for output is income to someone and is spent on output.
    • Expenditure is always the smallest of the three measures, since households save more than they spend in every period.
    • Output is always the largest of the three measures, since firms produce more than households spend in every year at the time in question.
    • They always differ, because output counts only goods, income counts only services and expenditure counts only savings.

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