Which one of the following is a withdrawal from the circular flow of income?

Taxation paid to the government.

Exports sold to overseas buyers.

Government spending on public services.

Investment by firms in capital goods.

A household owns a flat worth £250,000 and receives £1,100 a month in rent from letting it. In economic terms

The flat is wealth and the rent is income.

Both the flat and the rent are income.

Both the flat and the rent are wealth.

The flat is income and the rent is wealth.

In the basic two-sector circular flow model, households supply land, labour, capital and enterprise to firms. This is best described as

A real flow from households to firms.

An injection into the circular flow.

A money flow from firms to households.

A withdrawal from the circular flow.

In an economy, total injections are currently greater than total withdrawals. All other things being equal, national income will

Expand until withdrawals rise to equal injections.

Contract until withdrawals fall to equal injections.

Remain unchanged, because the two flows are independent.

Remain unchanged, because injections always equal withdrawals.

Which one of the following would increase the size of the circular flow of income?

A rise in the rate of income tax.

An economy's equilibrium level of national income is below its full employment level of income. It follows that

The economy has spare capacity and unemployed resources.

Injections must exceed withdrawals at the current level of income.

The economy is producing on its production possibility frontier.

Withdrawals must exceed injections at the current level of income.

2.2.1 The Circular Flow of Income — Practice Questions

Eight original multiple-choice questions on the circular flow of income, written to the style and difficulty of AQA Paper 3 Section A.

8 questions AQA A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 2.2.1 The Circular Flow of Income revision notes.

8 questions in this set

1. Which one of the following is a withdrawal from the circular flow of income?

Definition in context

Select one answer
A Exports sold to overseas buyers.

B Government spending on public services.

C Investment by firms in capital goods.

D Taxation paid to the government.
Show model answer
Answer: D (Taxation paid to the government.). A withdrawal is money that leaves the circular flow rather than being passed on as domestic spending. The three withdrawals are saving, taxation and imports. Tax paid to the government is income households neither spend on domestic output nor save, so it leaves the flow.

Why the other options are wrong
- A — Exports are an injection. They are spending by overseas buyers entering the domestic flow.
- B — Government spending is an injection. It is the counterpart of taxation, not another withdrawal.
- C — Investment is an injection. Firms are adding new spending on capital goods to the flow.
2. A household owns a flat worth £250,000 and receives £1,100 a month in rent from letting it. In economic terms

Definition in context

Select one answer
A Both the flat and the rent are income.

B Both the flat and the rent are wealth.

C The flat is income and the rent is wealth.

D The flat is wealth and the rent is income.
Show model answer
Answer: D (The flat is wealth and the rent is income.). Wealth is a stock of assets held at a point in time; income is a flow of money received over a period. The flat is an asset the household owns, so it is wealth. The £1,100 a month it generates is received over time, so it is income.
The relationship runs one way: wealth generates income, which is why the two are so easily confused.

Why the other options are wrong
- A — The flat is not received over a period of time — it is held. Counting an asset as income would mean adding its whole value to this year's earnings.
- B — The rent arrives month after month, which is what makes it a flow rather than a stock.
- C — This has the two exactly the wrong way round. The test is whether something is held at a point in time or received over a period.
3. In the basic two-sector circular flow model, households supply land, labour, capital and enterprise to firms. This is best described as

Applied reasoning

Select one answer
A An injection into the circular flow.

B A money flow from firms to households.

C A real flow from households to firms.

D A withdrawal from the circular flow.
Show model answer
Answer: C (A real flow from households to firms.). The model has two sets of flows running in opposite directions. Real flows are the factor services and the goods and services themselves; money flows are the payments made for them. Factors of production moving from households to firms are real, not monetary.
The money flow in the other direction is the rent, wages, interest and profit firms pay for those factors.

Why the other options are wrong
- A — Injections are additions of new spending from outside the basic two-sector model — investment, government spending and exports. Factor services are internal to it.
- B — The money flow from firms to households is the payment for these factors, not the factors themselves.
- D — Withdrawals are saving, taxation and imports. Supplying factors of production takes nothing out of the flow.

4. Table 1 shows the injections into and withdrawals from an economy's circular flow of income in one year.
Using Table 1, all other things being equal, national income will

Data interpretation

Table 1: Injections and withdrawals
Item	Value
Investment	£180bn
Saving	£200bn
Government spending	£250bn
Taxation	£270bn
Exports	£310bn
Imports	£290bn

Select one answer

A Contract, because withdrawals exceed injections by £20bn.

B Contract, because withdrawals exceed injections by £40bn.

C Expand, because injections exceed withdrawals by £20bn.

D Remain unchanged, because injections equal withdrawals.

Show model answer

Answer: A (Contract, because withdrawals exceed injections by £20bn.). Sort each item into an injection or a withdrawal, then total the two.
Injections = investment + government spending + exports = £180bn + £250bn + £310bn = £740bn.
Withdrawals = saving + taxation + imports = £200bn + £270bn + £290bn = £760bn.
Withdrawals exceed injections by £20bn, so more money is leaving the flow than entering it and national income contracts.

Why the other options are wrong

B — £40bn comes from leaving trade out and comparing only investment and government spending (£430bn) with saving and taxation (£470bn). Exports and imports belong in the totals.
C — £20bn is the right gap with the sign reversed, which comes from swapping government spending and taxation. Government spending is the injection; taxation is the withdrawal.
D — The two totals are not equal — that is the condition for equilibrium, which this economy is not in.

5. In an economy, total injections are currently greater than total withdrawals. All other things being equal, national income will

Applied reasoning

Select one answer
A Contract until withdrawals fall to equal injections.

B Expand until withdrawals rise to equal injections.

C Remain unchanged, because the two flows are independent.

D Remain unchanged, because injections always equal withdrawals.
Show model answer
Answer: B (Expand until withdrawals rise to equal injections.). More money is entering the flow than leaving it, so the flow grows and national income rises. As income rises, so do the things that depend on it — saving, tax paid and spending on imports — so withdrawals rise towards injections. The process stops when the two are equal again, which is the equilibrium condition J = W.

Why the other options are wrong
- A — Contraction is what happens in the opposite case, when withdrawals exceed injections.
- C — The two are not independent. Withdrawals are driven by the level of income, which is exactly why the adjustment happens.
- D — Injections and withdrawals are equal only in equilibrium. They are planned by different groups for different reasons, so there is nothing forcing them to match at any given moment.
6. Which one of the following would increase the size of the circular flow of income?

Applied reasoning

Select one answer
A A fall in exports.

B A rise in imports.

C A rise in the rate of income tax.

D A rise in investment by firms.
Show model answer
Answer: D (A rise in investment by firms.). The flow grows when injections rise or withdrawals fall. Investment is an injection, so a rise in it puts more new spending into the flow and national income expands.

Why the other options are wrong
- A — Exports are an injection, so a fall in them shrinks the flow rather than expanding it.
- B — Imports are a withdrawal. A rise in them takes more money out of the domestic flow.
- C — Taxation is a withdrawal. A higher tax rate takes a larger share of income out of the flow.
7. A worker's money income rises by 6% over a year in which the general price level rises by 2%. All other things being equal, the worker's real income has

Calculation

Select one answer
A Fallen by about 4%.

B Risen by about 3%.

C Risen by about 4%.

D Risen by about 8%.
Show model answer
Answer: C (Risen by about 4%.). Real income is money income adjusted for the change in prices, so the two rates are subtracted.
6% − 2% = 4%.
The worker's pay buys about 4% more than it did a year ago. Money income alone cannot answer the question, because part of any pay rise is simply keeping up with prices.

Why the other options are wrong
- A — This subtracts the wrong way round, 2 − 6. Real income only falls when prices rise faster than money income.
- B — 3 is 6 ÷ 2. Inflation is subtracted from the growth in money income, not divided into it.
- D — 8 adds the two rates. Adding would mean inflation had made the worker better off.
8. An economy's equilibrium level of national income is below its full employment level of income. It follows that

Applied reasoning

Select one answer
A Injections must exceed withdrawals at the current level of income.

B The economy has spare capacity and unemployed resources.

C The economy is producing on its production possibility frontier.

D Withdrawals must exceed injections at the current level of income.
Show model answer
Answer: B (The economy has spare capacity and unemployed resources.). Equilibrium means injections equal withdrawals, so the flow is stable — but it is stable at a level of income below the one that would fully employ the economy's resources. That gap is precisely spare capacity: factors of production, labour above all, that are available but not being used.
The important point is that an economy can settle at this level and stay there. Equilibrium does not mean full employment.

Why the other options are wrong
- A — If injections exceeded withdrawals the flow would still be expanding, so the economy would not be in equilibrium.
- C — Producing on the frontier means every resource is fully employed. An economy below full employment income is producing at a point inside its frontier.
- D — If withdrawals exceeded injections the flow would be contracting, so again this is not an equilibrium.

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Revision Notes: The Circular Flow of Income AQA Past Papers Book a Free Intro Call

1. Which one of the following is a withdrawal from the circular flow of income?

2. A household owns a flat worth £250,000 and receives £1,100 a month in rent from letting it. In economic terms

3. In the basic two-sector circular flow model, households supply land, labour, capital and enterprise to firms. This is best described as

4. Table 1 shows the injections into and withdrawals from an economy's circular flow of income in one year.Using Table 1, all other things being equal, national income will

5. In an economy, total injections are currently greater than total withdrawals. All other things being equal, national income will

6. Which one of the following would increase the size of the circular flow of income?

7. A worker's money income rises by 6% over a year in which the general price level rises by 2%. All other things being equal, the worker's real income has

8. An economy's equilibrium level of national income is below its full employment level of income. It follows that

Your score

4. Table 1 shows the injections into and withdrawals from an economy's circular flow of income in one year.
Using Table 1, all other things being equal, national income will