The circular flow of income in a closed economy, Macroeconomics

Assignment Help:

 

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. 

 


Related Discussions:- The circular flow of income in a closed economy

Appropriate experimental design, An ecologist has been reading the literatu...

An ecologist has been reading the literature on the subject of factors affecting growth and metamorphosis of tadpoles in ponds. Some frog species (e.g. Hyla gratiosa) reproduce in

What do learn by study of the supply curve concepts, What do learn by study...

What do learn by study the supply curve concepts? a. The relationship in between quantity of inputs and output b. Why production is frequently subject to reducing  returns

Augmented phillips curve, Q. Augmented Phillips curve? Remember that Ph...

Q. Augmented Phillips curve? Remember that Phillips curve, as it was incorporated into the Keynesian model, presumed a stable relationship between wage inflation andunemploymen

OPEN-MARKET MACROECONOMICS, Macroeconomics: Question 1 and 2 relate to cont...

Macroeconomics: Question 1 and 2 relate to content and skills covered --- OPEN-MARKET MACROECONOMICS: BASIC CONCEPTS , International Trade and Exchange Rates Question 3 relates to

Aggregeta demand and aggregate supply, Using an aggregate demand and supply...

Using an aggregate demand and supply diagram, explain how each of the following scenarios affects the equilibrium price level and aggregate output a/Consumers expect a recession b/

Strategic vs. tactical approaches, Consider Gold-Bernstein's Integration ro...

Consider Gold-Bernstein's Integration roadmap (p. 18).  Construct two business examples, one that clearly calls for a strategic integration effort and the other that call

Help, i want an answer for my q Question 3 (5 marks) Most studies of firm...

i want an answer for my q Question 3 (5 marks) Most studies of firms’ long run costs have found that average costs decline as firms produce increasingly larger output levels (eco

Using a different method colleagues different solution, Consider the follow...

Consider the following homogenous difference equation: xt=b0+b1xt-1 a) Iterate backwards xt can be written in terms of xt-2. b) Now show xt can be written in terms of xt-3 a

The income tax rate is reduced, If income falls below its potential and the...

If income falls below its potential and the income tax rate is reduced, this will: A. raise the passive deficit but reduce the structural deficit. B. raise both the passive and str

Credit, How credit is created or the creation of credit

How credit is created or the creation of credit

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd