“c01ThinkingLikeAnEconomist_PrintPDF” — 2022/7/18 — 23:09 — page 39 — #37
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Weblinks The circular flow model of a market economy Circular flow Circular flow matrix
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1. This set of questions is about economic systems: a. Define the term, economic system. (1 mark) b. Outline the three basic economic questions that all economic systems must answer. (3 marks) c. Contrast a pure market economy from a purely planned economy. (4 marks) d. Explain what is meant by market failure that can occur in free or pure market economies. (2 marks) e. These days, most countries have mixed economies. Outline what is meant by a mixed economy. (2 marks) f. For each of the following areas, identify and outline one important market failure and suggest how government intervention in decision making can help to overcome the problem: i. answering the what and how much to produce question ii. answering the how to produce question iii. answering the for whom to produce question. (3 marks) 2. This question is about the simple three-sector circular flow model for a mixed economy: a. Describe the operation of this circular flow model. (3 marks) b. Distinguish the roles of the household or consumer sector from those of the business or producer sector. (2 marks) c. Outline the main purposes or roles of the public or government sector in this economy. (2 marks) 3. This is a problem solving task. Assume that the small African country of Zenophobia originally had a GDP equal to $3 million in 2023. Referring to parts of a three-sector circular flow model for Zenophobia, explain logically, using the correct order or sequence, what would happen to the country’s economic conditions (i.e. production, employment of resources, incomes and living standards) given each of the following hypothetical events: a. Households and governments decide to reduce their spending to $2.6 million. (3 marks) b. The value of GDP increases to $3.9 million. (3 marks) c. There is a dramatic rise in the total value of income paid to households by $1.1 million. (2 marks) 4. The following application question is about economic systems. Imagine you and your friends were stranded on an uninhabited tropical island, without any provisions or money: a. To survive, identify the three basic economic questions or choices your group would have to answer. (3 marks) b. To organise the production and distribution of goods, services and incomes, describe which one of the four types of economic system you believe would be best suited to answer the three basic economic questions. Justify your choice of system. (2 marks) Solution and sample responses are available online.
TOPIC 1 Thinking like an economist
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