Use the following to answer questions:
-(Figure 7-1: Circular-Flow Model) Use Figure 7-1: 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 an increase in consumer spending, holding everything else constant, which outcome is likely to occur?
A) an increase in GDP
B) a decrease in GDP
C) an increase in the unemployment rate
D) a decrease in the inflation rate

Question

Use the following to answer questions: 
-(Figure 7-1: Circular-Flow Model) Use Figure 7-1: 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 an increase in consumer spending, holding everything else constant, which outcome is likely to occur?
A) an increase in GDP 
B) a decrease in GDP 
C) an increase in the unemployment rate 
D) a decrease in the inflation rate

Quizplus · Accepted Answer

An increase in consumer spending will lead to an increase in the flow of money into the product markets as consumers purchase more goods and services. This will increase the demand for goods and services, leading firms to produce more, which in turn will increase GDP. As long as the increase in consumer spending does not result in an increase in production costs, the increase in GDP will not lead to an increase in inflation or unemployment.

Use the Following to Answer Questions