The circular flow of income in a closed economy, Macroeconomics


The circular flow of income in a closed economy 

A closed economy exists when there is no international trade. We shall also assume that in this particular closed economy there is no government spending or taxation. Here households have two alternatives used for their income - they can consume it or they can save it. Savings are (S).

AD consists of consumption (C) and Savings (S).S are lost to Y and will reduce the level of Y. However, some (if not all) of S will be used to finance investment (I). I is the creation of real capital goods such as machinery and factories, and adds to Y. If S = I, then Y is in equilibrium. 


651_The circular flow of income in a simple economy where all income is consumed.png







In this economy             


               Y = AD

Therefore, Y = C + I

In equilibrium S = I

However, if S is greater than I, AD and Y will fall. If I is greater than S, AD and Y will rise. 


Posted Date: 9/11/2012 7:44:29 AM | Location : United States

Related Discussions:- The circular flow of income in a closed economy, Assignment Help, Ask Question on The circular flow of income in a closed economy, Get Answer, Expert's Help, The circular flow of income in a closed economy Discussions

Write discussion on The circular flow of income in a closed economy
Your posts are moderated
Related Questions
A significant argument for the augmentation has to do with concept of money illusion. Money illusion means that you care about nominal rather than real amounts. Imagine that your s

What are the best criteria to select peers for a country ?

Aggregate Supply in the Short Run Production takes place in business sector on the basis of an expected price for its output. However, costs are incurred in anticipation of sa

The events X and Y are mutually exclusive. Suppose P(X)=.05 and P(Y) =.02. What is the probability of either X or Y occurring? What is not probability of X nor Y happens?

Hello, I am having difficulty in understanding what multiplier is.

Suppose the consumption function is C = $500 billion + 0.55Y and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially

Here from a), profit maximizing price = 7 and Q = 10. It is shown in the figure below:- The consumer surplus is shown in blue area which is given as (9-7) *10*1/2 =10 dolla

POSITIVE AND NORMATIVE ECONOMICS Economics as a social science adopts an analytical approach to the study of changes in economic variables on the actions of human beings. Th

Find the labor force, the working-age population, the number of employed workers, and the number of unemployed workers. Unemployment rate 5.60 % Participation rate 62.50

The Budget Line: The Consumer Constraints The consumer would like to maximize his satisfaction by reaching the highest possible indifference curve. But in the process, he faces