Fig. 1 shows a simplified circular flow for a town economy. Household spending has decreased because inflation reduced real income. HouseholdsFirmsspendingw...
Question 1 Report
Fig. 1 shows a simplified circular flow for a town economy. Household spending has decreased because inflation reduced real income.
(a) What happens to firms' revenue when household spending falls? [1]
(b) Explain one possible effect of lower firm revenue on the government's unemployment objective. [2]
Answer Details
(a) Firms' revenue decreases when household spending falls. [1] In the circular flow, household spending is revenue received by firms.
(b) With less revenue, firms may reduce output or cut costs. [1] They may dismiss workers or recruit fewer workers, increasing unemployment and making the government's unemployment objective harder to achieve. [1]
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