Question

3.1 With aid of the circular flow of income and spending in the economy diagram,
describe how various participants in the economy and the government interact with
each other. Describe how this ensures the effective and efficient operating of the
country.
3.2 Government participation in the economy is essential to improve the standard of
living of the people. Critically provide a detailed analysis of the policies that the
government could use to increase the living standards of the people.

Answer 1

Describing 4 sector model circular flow of income starts with an initial two-sector i.e household and firm.

1. it describes the close relationship between two-sector for providing factors of production and finished goods and services.

2. Payment for factors of production and payment for goods and services.

Second phase: the involvement of Government

1. government collecting tax from both household and firm sectors in the name of income tax and production tax.

2. The government pays money to the household for their services and do expenditure on the firm establishment, providing subsidy and another facility to the firm.

Third phase introduction of the capital market.

1. it works like a mediator between all these sectors. taking deposits and lending money is the major work of action for this particular sector.

b) when the government enters to the circular flow of income process its duty is to regulate and keep synchronization between two-sector. the main agenda of the government to enhance public welfare. so to provide so it uses to impose a tax on household and firm. with that collected money, they \use to provide road, hospital. basic free services to BPL people Health, security education, and other primary sectors financing to bring the economy to an established level.