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Macroeconomic Theory (AS)

The circular flow of income model: Flows in the circular flow model

  • 3 things to know
  • AS Units 1 and 2

Overview

Recall questions on The flows in the circular flow model.

What you need to know

Answer each one before you reveal it.

Your recallNot started
Key term

Define each term in the equation Y = O = E.

Key term

State the fundamental identity that holds in the circular flow model.

Key term

What factors of production do households supply to firms in the circular flow?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    What does the circular flow of income model illustrate about an economy?

    Model answer

    It shows the continuous movement of money, goods, and services between households and firms in an economy.

  2. 2

    State the fundamental identity that holds in the circular flow model.

    Model answer

    Income equals output equals expenditure (Y = O = E).

  3. 3

    Define each term in the equation Y = O = E.

    Model answer

    Y represents national income, O represents national output, and E represents national expenditure.

  4. 4

    What factors of production do households supply to firms in the circular flow?

    Model answer

    Labour, land, capital, and enterprise.

  5. 5

    What factor incomes do firms pay to households in return for the factors of production?

    Model answer

    Wages, rent, interest, and profit.

  6. 6

    In the circular flow, what flows from firms to households in the product market?

    Model answer

    Goods and services.

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