Question

Study Guide Macroeconomics Page 13 9. The simple two sector circular flow model is said to be in equilibrium when A. total leakages exactly match total injections B. there is no tendency for money flows to change C. real and money flows are in balance D. all the above apply E. 10. The MPC for an economy A. increases as national income increases B. falls as national income increases C. remains constant for any change in national income D. falls when national income decreases TRUE AND FALSE (Tick the appropriate column).

Answer 1

9. Answer is Option A. Below are the detailed reasons:

A. In equilibrium, leakages (such as consumer savings) equals injections (such as fixed investment) and the circular flow remains of same size. If injections > Leakages , then circular flow grows. If Injections < Leakages, the circular flow shrinks. So, Option A is correct/True

B. Flow of money will change as per the economic situations. In depression, the money flows contract and in booming period, they will increase in greater volume. This is also due to the fact that Money flows are the measure of National Income. So, when NI falls (during recession), money flows will also fall. So, this option is FALSE

C. Money flows include flow of money from household to firms as consumption expenditure incurred by household. Real flows include flow of goods and services from business firms to households. As discussed in option B. the value of real and money flows depends largely on National Income which changes frequently as per the economic conditions. So, the equality between real and money flows will not hold. So, Option C. is incorrect.

10. Answer is Option B.

A. MPC shows the proportion of additional consumption which occurs with an increase in income. As National Income increases, people tend to save more and consume less. When their income was less, a greater proportion of the income was going into consumption expenditure of necessity goods. So, this option is FALSE

B. As discussed in option A. a rise in income will lead to a fall in the consumption level, thereby decreases the MPC. So, this option is TRUE.

C. As MPC = Slope of the consumption Line and shows a change in consumption for a unit change in income level. So, As income changes, MPC also changes. So, Option C is FALSE

D. When National Income decreases, the MPC rises as people now tend to do more consumption expenditure for buying necessity goods. So, MPC increases. This option is FALSE