Introduction to the circular flow of income · AS Level Economics

What would be an injection into the circular flow of income?

• Aan increase in imports
• Ban increase in investment
• Can increase in savings
• Dan increase in taxation dge University Press & Assessment 2026 06 9708 11 2026 1 8

What are injections into the circular flow of income?

• Agovernment spending, investment and exports
• Bgovernment spending, savings and imports
• Cinvestment, savings and exports
• Dinvestment, taxes and imports

What represents a leakage from the circular flow of income in an economy?

• Aa balance of trade surplus
• Ba government budget surplus
• Creduction in firm’s spending on research and development
• Dreinvestment of a firm’s profits

Which row correctly identifies net injections into a country’s circular flow of income?

government expenditure savings exports > taxation > investment > imports

• Ano no yes
• Bno yes no
• Cyes no yes
• Dyes yes no

What is an example of an injection into the circular flow of income in an open economy?

• Aconsumer spending on goods
• Bexpenditure on a government construction project
• Cspending by households on holidays abroad
• Drepayment of loans to commercial banks

A government is planning to increase its expenditure on defence. Half of this expenditure will be on equipment such as planes and weapons which it will have to import as it does not produce this equipment domestically.

What is the initial impact on injections and leakages from the circular flow of income?

• AThe initial rise in injections is greater than the initial rise in leakages.
• BThe initial rise in injections is greater than the initial fall in leakages.
• CThe initial rise in injections is smaller than the initial rise in leakages.
• DThe initial rise in injections is smaller than the initial fall in leakages.

An open economy with a government is in equilibrium at a national income of $900 million.

Households spend $700 million and save $50 million.

Firms spend $100 million on investment.

The government spends $150 million and has a balanced budget.

How much is spent on exports and imports?

export spending import spending ($ million) ($ million)

• A100 100
• B100 50
• C50 100
• D50 50

An open economy with a government sector is in equilibrium. Households in this economy save $100 million and firms spend $150 million on investment.

Which combination of the budget balance and the current account balance would lead to an equilibrium position on the circular flow of income?

budget balance current account balance

• A$100m deficit $50m deficit
• B$100m deficit $50m surplus
• C$100m surplus $50m deficit
• D$100m surplus $50m surplus

Based on the circular flow of income, which condition is necessary for an open economy to be in equilibrium?

• AGovernment investment is equal to private investment.
• BPlanned injections are equal to planned withdrawals.
• CSpending by households is equal to taxes collected by government.
• DValue of export earnings is equal to expenditure on imports.

, , 16 What is always regarded as a cause, rather than a consequence, of a change in the circular flow of income?

• Aa decrease in government tax revenue
• Ban increase in consumption spending
• Can increase in savings
• Dan increase in the value of exports

The table shows some data for an economy.

government national investment exports savings imports taxation expenditure income ($ million) ($ million) ($ million) ($ million) ($ million) ($ million) ($ million)

200 100 50 125 62.5 62.5 600

200 100 50 150 75 75 700

200 100 50 175 87.5 87.5 800

200 100 50 200 100 100 900

What is the equilibrium level of national income?

• A$600 million
• B$700 million
• C$800 million
• D$900 million

With the help of a diagram, explain the circular flow of income in an open economy with government intervention and consider the extent to which the level of income in this economy may change following its transition to a closed economy. [8]

Assess the extent to which a government can use fiscal policy to influence leakages from and injections into the circular flow of income to achieve any two of its macroeconomic objectives. [12]

Explain what is meant by the circular flow of income in a closed economy with a government sector and consider the impact of a move from a closed economy to an open economy on this circular flow. [8]

Explain how the circular flow of income in an economy changes when that economy moves from a closed to an open economy and consider what determines the extent of the change. [8]