Name: ___________________________________

Flow of Economic Activity Practice

Directions: For each example below, predict whether the event should cause the economy to increase or decrease production and
consumption of goods and services. Pick either A or B as the predicted outcome.

A. An increase in production will cause the economy to grow and the circular flow model will move faster
B. A decrease in production will cause the economy to produce less and the circular flow will move more slowly.

1. Workers increase their education and training and become more productive. ______
2. Interest rates are so high that companies do not invest in new capital. ______
3. Many new technologies and inventions reduce the costs of production. ______
4. Environmental regulations make it more difficult to use land resources. ______
5. Producers discover new sources of energy and other natural resources. ______
6. Many people fear that they might lose their jobs. ______
7. New laws encourage people to invest in new businesses. ______
8. People have more income and feel good about the future of the economy. ______
9. Many workers strike and refuse to produce goods and services______
10. There is political instability in some regions of the world and business owners people fear that conflicts that will stop trade.
______

Directions: Identify which of the sectors and/or markets are being described by the following statement.

1. Businesses make profits in this market

2. These sectors buy goods and services from the product market
3. Consumers earn their income in this market
4. Businesses buy capital goods in this market
5. Consumers spend their income in this market
6. This sector includes all the countries in the world
7. Businesses buy natural resources in this market

Multiple Choice:

1. The two primary players in the circular flow model are:

A. People and Stores C. Businesses and People

B. Households and Businesses D. Households and Schools

2. What is the driving force behind the circular flow of the market economy?

A. Money C. Income
B. Profits D. Scarcity

3. What do businesses provide for the outside parties?

A. Goods C. Money
B. Services D. Goods and services

4. What are the technical terms for the two main parties in the model?

A. Consumers and factories C. Individuals and Entrepreneurs

B. Producers and consumers D. Consumers and businesses owners

5. What are the resources employed to produce goods and services?

 A. Income flow C. Factors of production
B. Labor market D. Total working force

6. The circular flow of a market economy also assumes that consumers spend all their money on goods, services, and
consumptions. This means that there is no _________ on the part of the consumer.

A. Saving C. Borrowing
B. Investing D. Lending

7. Businesses provide a(n) _________ to households through employment.

A. Job C. House
B. Products D. Income

8. ___________ is the driving force behind the production of goods and services.

A. Labor C. Government
B. Money D. Economic policies

9. The ___________ is where businesses buy the materials and labor needed to produce their product.

A. Material market C. Factor market

B. Employment market D. Product market

10. In the circular flow model, who is a seller in the factor markets and a buyer in the product markets?

A. A business C. Households
B. Transnational corporations D. Producers

Short Answer:

1. Your book describes the circular flow of Economic Activity; how does the statement “everyone’s expenses are someone else’s
income” fit the model as stated in your text?

2. How do YOU fit “economically” into the circular flow of economic activity? Explain.