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 a decrease in consumer spending, holding everything else constant, which outcome is likely to occur?
A) an increase in nominal GDP
B) an increase in real GDP
C) an increase in the unemployment rate
D) an increase 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 a decrease in consumer spending, holding everything else constant, which outcome is likely to occur?
A) an increase in nominal GDP 
B) an increase in real GDP 
C) an increase in the unemployment rate 
D) an increase in the inflation rate

Quizplus · Accepted Answer

A decrease in consumer spending will cause a decrease in the flow of money in the product market (from households to firms) and therefore a decrease in the flow of money in the resource market (from firms to households). This will create a surplus of goods and services, leading firms to decrease their production and lay off workers, increasing the unemployment rate. It will not lead to an increase in GDP (nominal or real) or inflation rate.

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