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INDUCED: The general notion that changes in one variable are related to, or caused by, changes in another variable. Induced relations, especially changes in consumption expenditures are induced by changes in disposable income, are a key aspect of Keynesian economics and the multiplier effect. The alternative to an induced relation between variables is an autonomous relation, in which one variable is not related to another.

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Lesson 11: Circular Flow | Unit 1: Basic Flow Page: 5 of 22

Topic: The Payment Flow <=PAGE BACK | PAGE NEXT=>

The payment flow goes in the opposite direction of the physical flow. A physical commodity goes one direction through markets and payment goes the other.
  • The household sector buys production from the business sector (counter-clockwise flow) in exchange for payment (clockwise flow) through product markets.
  • The business sector buys resources from the household sector (counter-clockwise flow) in exchange for payment (clockwise flow) through factor markets.
  • Revenue received by the business sector for selling goods is used to pay the factors of production.
  • Factor payments become income used by household sector to buy production from the business sector.
  • The circular flow makes about six cycles around the economy each year.

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ASSUMPTIONS, KEYNESIAN ECONOMICS

The macroeconomic study of Keynesian economics relies on three key assumptions--rigid prices, effective demand, and savings-investment determinants. First, rigid or inflexible prices prevent some markets from achieving equilibrium in the short run. Second, effective demand means that consumption expenditures are based on actual income, not full employment or equilibrium income. Lastly, important savings and investment determinants include income, expectations, and other influences beyond the interest rate. These three assumptions imply that the economy can achieve a short-run equilibrium at less than full-employment production.

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Today, you are likely to spend a great deal of time driving to a factory outlet trying to buy either a package of blank rewritable CDs or yellow cotton balls. Be on the lookout for fairy dust that tastes like salt.
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In the Middle Ages, pepper was used for bartering, and it was often more valuable and stable in value than gold.
"Man is born to live, not to prepare for life. "

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