DESCRIBING THE CIRCULAR FLOW MODEL (Section worth 8 points)

 

DESCRIBING THE CIRCULAR FLOW MODEL (Section worth 8 points)

 

1. Draw and label the basic Circular Flow Model. (4 points). Identify resource markets and product markets by drawing labeling an oval. Identify Households and Firms by drawing and labeling boxes. Using arrows, identify the flow of:
   1. Goods and services
   2. Rent, wages, interest and profit.
   3. Expenditures on goods and services.
   4. Land, labor, capital and entrepreneurship

 

 

2. Which of the flows represents the tuition you paid for this course? (1 point)

 

3. Which of the flows represents the payment made to the instructor of the course? (1 point)

 

4. Describe what would happened to the demand for labor in the resource market if an increase in taxes reduced the amount of disposable income households had to spend on goods and services. (2 points)

 

 

AGGREGATE DEMAND AND AGGREGATE SUPPLY CURVE INTERPRETATION (Section worth 12 points)

 

5. Describe factors listed in your textbook that would cause the aggregate demand and aggregate supply curves to shift. (2 points).

 

 

6. According to Keynesian theorist, explain the difference in the slope of the supply curve in the short-run and in the long run. Why is this so? (2 points)

 

 

 

 

 

Using the graph above for the following questions. Assume the economy is at long-run equilibrium and full-employment at point D.

 

7. Describe what happens to output and price-levels with demand-pull (1 point)

 

8. What point on the graph would illustrate demand-pull inflation? (1 point)

 

9. Describe what happens to output and price-levels with cost-push (1 point)

 

10. What point on the graph would illustrate cost-push inflation? (1 point)

 

 

 

 

Using the graph above for the following questions. Assume the economy is at long-run equilibrium and full-employment at point A.

 

11. Describe what would happen if the stock market and housing prices declined significantly. (1 point)

 

12. Given the scenario in #11 above, according to Keynesian theory, at what point on the graph would the economy be operating? (1 point)

 

13. Given the scenario in #11 above, describe the process by which the economy would self-correct from this situation and return to full-employment. (2 points)