Cambridge International A Level · Economics (9708)

The circular flow of income: Practice Questions

5 multiple-choice questions marked as you go, and 4 written questions with worked solutions. All on The circular flow of income.

9 questions24 marksFree, no account

Question 1

1 mark

In a four-sector model of the circular flow of income, which of the following combinations consists entirely of leakages (withdrawals)?

Question 2

1 mark

Which of the following conditions will lead to an increase in the equilibrium level of national income in the circular flow of income?

Question 3

1 mark

The table shows components of the circular flow of income for an economy at different levels of national income ($ Y $). All values are in $ \$ $ billions.

$ Y $: 1000 | 1200 | 1400
$ C $: 700 | 840 | 980
$ I $: 200 | 200 | 200
$ G $: 150 | 150 | 150
$ X - M $: -50 | -70 | -90

What is the equilibrium level of national income for this economy?

Question 4

1 mark

The paradox of thrift suggests that if all households in an economy simultaneously attempt to increase their marginal propensity to save, the most likely outcome is:

Question 5

1 mark

In a closed economy without a government sector, the marginal propensity to consume is $0.8$. If the government introduces a balanced budget by increasing both government spending and tax revenue by $\$100$ million, what will be the impact on the equilibrium level of national income?

Question 6

3 marks

Explain the relationship between the average propensity to consume ($apc$) and the marginal propensity to consume ($mpc$) as national income increases, assuming autonomous consumption is positive.

Write your answer out first, then check it against the worked solution.

Question 7

6 marks

If an economy is in a state of disequilibrium where planned injections ($J$) exceed planned leakages ($W$), describe the process by which the circular flow adjusts to restore a new equilibrium.

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Question 8

3 marks

Using the formula for the national income multiplier in a simple closed economy, explain how an increase in the marginal propensity to save ($ mps $) affects the total change in national income resulting from a decrease in investment.

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Question 9

7 marks

(a) Distinguish between autonomous investment and induced investment, and explain how the accelerator principle determines the level of investment in the circular flow of income.
(b) Evaluate the impact on the circular flow of income if a government increases the marginal rate of taxation $ (mrt) $ during a period of economic recession. In your answer, consider the effect on both the multiplier and the equilibrium level of national income.

Write your answer out first, then check it against the worked solution.

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