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CMS-ID: 315-2019
2. What will happen to the equilibrium price (based on shifting of Demand/Supply) and quantity of
butter in each of the following cases:
6. In terms of the circular flow of income, are the following net injections, net withdrawals or
neither? If there is uncertainty, explain your assumptions.
a. Firms are forced to take a cut in profits in order to give a pay rise.
b. Firms spend money on research.
c. The government increases personal tax allowances.
d. The general public invests more money in building societies.
e. Investors earn higher dividends on overseas investments.
f. The government purchases military aircraft.
g. People draw on their savings to finance holidays abroad.
h. The government runs a budget deficit (spends more than it receives in tax
revenues).
Answer:
A. Neither, there is merely a redistribution of factor payments on the left-hand side of the inner
flow. (The only exception to this would be if a smaller proportion of wages were saved than of
profits. In this case there would be a net reduction in withdrawals.)
B. Increase in injections (investment).
C. Decrease in withdrawals (net taxes).
D. Increase in withdrawals (investment).
E. Fall in withdrawals.
F. Neither. The inner flow is unaffected. If, however, this were financed from higher taxes, it would
result in an increase in withdrawals.
G. Neither. The inner flow is unaffected. The consumption of domestically produced goods and
services remains the same.
H. Neither. An increase in government expenditure (or decrease in taxes, or both).