Economics 101Chapter10

Economics 101Chapter10 - 1 Objectives for Chapter 10 The...

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Objectives for Chapter 10 The Circular Flow Model At the end of Chapter 10, you will be able to answer the following: 1. Explain the basic circular flow model . 2. Define "consumption" and "saving" 3. Explain why Nominal Gross Domestic Product (GDP) and National Income must be equal. 4. Explain the difference between durable goods, non-durable goods, and services . 5. Add savings and investment spending into the circular flow. Explain their effects. 6. Explain is the condition for macroeconomic equilibrium with neither recession nor inflation? Why? 7. Explain under what conditions there will be a recession (or a deflation)? 8. Explain under what conditions there will be inflation? 9. Add the Government Sector onto the circular flow model. Explain its effects. 10. Define "government purchases"; "government transfers" 11. Define “disposable income”. 12. Define "budget deficit" and "budget surplus" . 13. Explain under what conditions a budget deficit is appropriate? Explain how this budget deficit is financed? 14. Explain under what conditions a budget surplus is appropriate? Explain how this budget surplus is disposed of. 15. Add the International Sector into the circular flow model. Explain its effects. 16. Define "import"; "export"; "trade deficit"; "trade surplus" 1
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Chapter 10 The Circular Flow Model (Latest revision May 2006) The basic circular flow model provides a picture of the interconnection of the various aspects of our economy. As an analogy, it provides a picture of the “forest”. In subsequent chapters, we shall examine the individual “trees” in detail. As we examine the details of the various aspects of our economy and see how they interconnect, we can understand why the economic problems of slow economic growth, unemployment, or inflation might result. We can also understand how these problems might be solved. We will build the basic circular flow model step by step. We begin with some simplifying assumptions. These are not realistic; but they do allow us to understand the main points of the model. In each subsequent step, we shall make the model more and more realistic until we have a good picture of the interconnections that are important. Our model is much like a road map. Just as a road map does not show every bump in the road or every turn, our model will not show every detail of the economy. And just as a road map does give us enough information to get from one place to another, our circular flow model provides us enough information to understand much about our economy. We begin with some very simplifying assumptions. First, assume there is no government at all. And second, assume there are neither exports nor imports . (We will change these assumptions below). Let us divide what is left into two groups. On the one hand, we have businesses . Businesses are responsible for the organization of production. To help us understand, assume there is only one product in the world. Call it a “widget” . Businesses are responsible for the production of widgets. If they hire all of
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Economics 101Chapter10 - 1 Objectives for Chapter 10 The...

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