Circular Flow of Income Quiz

The circular flow of income demonstrates that

• both producers and consumers are buyers and sellers

• firms provide the resources which are then used in production

• households are able to save and consequently invest in firms

• attempts by firms to raise prices will result in short-run losses

Which of the following is not an assumption of the simple circular flow model?

• no taxation or spending by government

• households spend all income on final goods and services

• technology and the quantity of resources are fixed

• there are two sectors, households and firms

Government taxation has the same effect on the circular flow of income as

• investment

• saving

• consumption

• depreciation

Foreign capital inflow into the Australia economy has the same effect on the circular flow as

• government taxation

• import spending

• domestic savings

• domestic investment

A reduction in the size of the circular flow will occur with an increase in

• government spending

• investment spending

• import spending

• income tax rates

If planned investment is greater than planned savings then the

• level of income will tend to rise

• level of income will tend to fall

• level of income will move into surplus

• level of income will remain unchanged

Which of the following is a leakage from the circular flow?

• factor payments

• government spending

• export receipts

• taxation

The Australian economy will experience a rise in economic activity when

• investment and government spending exceed domestic consumption

• savings and investment are less than net exports

• saving and taxation are less than investment and government spending

• net domestic consumption is greater than factor payments to households

In the circular flow model households receive income in the form of

• salaries, dividends, capital gains and rent

• wages, salaries and supplementary payments

• wages, salaries, dividends and rentals

• wages, rent, interest and profit

Investment is defined as

• the purchase of capital plus any changes in inventories

• the purchase of government bonds or debentures

• the accumulation of undistributed profits plus inventories

• the accumulation of reserve funds held in bank accounts