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Figure: Circular-Flow Model
-(Figure: Circular-Flow Model) Look at the figure Circular-Flow Model. If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of it) and there is a decrease in consumer spending, which of the following is likely to happen?
A)an increase in the nominal GDP
B)an increase in the real GDP
C)an increase in the unemployment rate
D)an increase in the inflation rate

Question

Use the following to answer questions :
Figure: Circular-Flow Model 
-(Figure: Circular-Flow Model) Look at the figure Circular-Flow Model. If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of it) and there is a decrease in consumer spending, which of the following is likely to happen?
A)an increase in the nominal GDP 
B)an increase in the real GDP 
C)an increase in the unemployment rate 
D)an increase in the inflation rate

Quizplus · Accepted Answer

If there is a decrease in consumer spending in the circular-flow model, it means that there will be less money flowing into the firms' box. This would cause a decrease in production, leading to a decrease in demand for labor, and ultimately, an increase in the unemployment rate. Therefore, the best choice is C. The other options are unlikely to occur since a decrease in consumer spending would lead to a decrease in aggregate demand and a decrease in the price level, resulting in a lower nominal GDP and a lower real GDP. It would also reduce the pressure on firms to increase prices, leading to a lower inflation rate.

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