Question

2. The circular flow of income and expenditure The income and expenditure approaches to measuring a nation's GDP can be combined using the circular flow model. Categorize each flow in the following table as part of either aggregate demand or national income. Flow Aggregate Demand National Income Net taxes (NT) O Investment spending (1) Consumption (C) Government purchases (G) OOO Net exports (X - IM) Disposable income (DI) 0 While national income and domestic product must be equal, income must also equal expenditure for each of the six sectors in the circular flow diagram: firms, consumers, government, financial system, investors, and the "rest of the world." For example, the amount of flowing into the government sector must equal the amount of flowing out of this sector taxes le as either an injection into the circular flow or a leakage from the circular flow. investment spending on transfers plus government purchases Leakage consumption plus saving

Answer 1

(1)

NT - national income

I - aggregate demand

C - aggregate demand

G - aggregate demand

(X - IM) - aggregate demand

DI - national income

(2)

Amount of taxes flowing into government sector must equal the amount of transfers plus government purchase flowing out of government sector.

(3)

S - leakage

NT - leakage

X - injection

I - injection

G - injection

M - leakage