The Usefulness of The Circular Flow of Income Model

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About this sample


Words: 964 |

Page: 1|

5 min read

Published: Jan 15, 2019

Words: 964|Page: 1|5 min read

Published: Jan 15, 2019

The globe is in panic as a result of the pandemic, a pandemic that has ravished and caused a lot of harm generally. The United States of America was at the receiving end of the pandemic, it was left unguided and the resultant effect of the pandemic was devasting, creating a large unemployment rate no one has ever seen since the great depression of 1929. Economics forecasted a dip in various country’s GDP and evidently, it happened. This essay tends to look at the effect of the shift from monetary policy to fiscal policy in the US bearing in mind the cash flow model as a quantifier.

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All countries experienced the economic effect of the pandemic and as a sort, some were proactive in handling the crisis economically and some weren’t. The USA was amongst the few who thought they could scale through its established policy but its reliance on the monetary policy was failing as the GDP dropped and a whole lot of people lost their jobs, some were in no shape to function and a few who worked remotely yielded little or nothing. Stafford claims that varnishing conditions would boost resource sharing between the business and the household because the structures share overlapping resources. The American Rescue Plan Act of2021, also known as the COVID-19 Stimulus Package or simply the American Rescue Plan, was passed by the 117th United States Congress on March11, 2021, and signed into law by President Joe Biden. The primary reason for this was to help move things forward a little faster in the united states recover from the economic and health destruction caused by the COVID-19 pandemic and the resulting continuing recession. It first proposed on January 14th, 2021, and it is based on several provisions in the CARES Act, which began in March 2020, and the Consolidated Appropriations Act, which began in December 2020.

Fiscal policy is ‘how a government adjusts its spending levels and tax rates to monitor and regulate a country’s economy,’ according to Investopedia.A necessary parameter to monitor this fiscal policy hangs within the power of the circular flow model since it’s a quantitative and analytical tool. Because of its inherent potential to influence the total amount of production generated, or GDP, fiscal policy is an essential tool for economic management. The first and most important effect of a fiscal extension is to increase relative demand for goods and services. As a result of the increased demand, both relative production and aggregate prices rise. The rate at which increased demand raises production and overall prices is determined by the state of the business cycle. If, on the other hand, the economy is in a slump, with underutilised productive potential and unemployed jobs, increased demand would usually result in more production without changing the price level. However, if the economy is at full employment, a fiscal expansion would have a greater impact on prices and a lesser impact on gross production. Shifting our gaze to the circular flow, it is predominantly established that the circular flow model being defined or seen as a demonstrative method of how money soars through the nation. As depicted, money flows through an indefinite chain from producers to employees as remunerations and streams back to producers as revenue for products. By the circular flow model, an economy is an infinite circular sequence of money. Because the cycle of cash influxes and outpourings specify the business solvency. The circular flow calculation aids in the maintenance of sufficient cash flow for the company and serves as a foundation for cash flow management. The circular flow model starts with the immediate household segment that engages in consumption spending and the business sector that goes into manufacturing the products, according to Noor (2012).

However, two more areas are also included mostly here in the circular flow of revenue, the first is the government sector and the second is the foreign trade sector. The government does or carries out the role of injecting money into the circle via government spending on programs such as Social Security and the National Park Service or a good instance would be situations like the pandemic. Exports, which bring in cash from international buyers, often bring funds or revenue into the circle. Furthermore, businesses that capitalise money to buy capital stocks contribute to the economy’s money supply. The resultant effect of the American Rescue plan is aimed at providing financial support to households and mostly those who are not able to cope with the hard and scouring economy, the plan which extends to both workers (employed) and the non-workers (unemployed), in turn, they will help boost the economy by purchasing from manufacturers and these manufacturers will be able to generate funds which inversely will be used to pay its employees thus creating an endless supply run of cash in and out of the US.

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It’s important to conclude that the circular flow model will inevitably provide statistical and quantitative analysis of the cash flow of the nation, proportionally its basic purpose will be to understand how money shifts within an economy. However, it severs the economy further into two primary players, which are the households and businesses. It further divides the markets in which these players compete into markets for products and services and markets for production. Mankiw (2001) admits that his circular flow model is a ‘simple model’ that ‘would include, for example, the functions of government and foreign trade’ in a ‘more complex and practical circular-flow model’. Since they are expenses paid to a foreign country, imports are like drips in the circular flow of money. The government introduces policies to increase exports and decrease imports in order to further reduce or eliminate this. The circular flow of money now, with the legislation, emphasizes the importance of implementing export promotion and import control policies.

Works Cited

  1. Stafford, A. (2022). Resource Sharing between Business and Household Structures during Economic Crises. Journal of Economic Dynamics and Control, 129, 104411. doi:10.1016/j.jedc.2022.104411
  2. American Rescue Plan Act of 2021, Pub. L. No. 117-2, 135 Stat. 4. (2021).
  3. Investopedia. (n.d.). Fiscal Policy. Retrieved from
  4. Mankiw, N. G. (2001). Principles of Economics. Cengage Learning.
  5. Noor, A. A. (2012). The Circular Flow of Income and Expenditure: A Textbook Example. International Journal of Economics and Financial Issues, 2(1), 34-41.
  6. Acemoglu, D., Laibson, D., List, J. A., & Mankiw, N. G. (2014). Principles of Economics (6th ed.). Cengage Learning.
  7. Blinder, A. S., & Solow, R. M. (1973). Does Fiscal Policy Matter? Journal of Public Economics, 2(4), 319-337. doi:10.1016/0047-2727(73)90026-5
  8. Congressional Budget Office. (2021). The Budget and Economic Outlook: 2021 to 2031. Retrieved from
  9. Taylor, J. B. (2020). Monetary Policy Rules Work and Discretion Doesn't: A Tale of Two Eras. Journal of Money, Credit and Banking, 52(S1), 183-197. doi:10.1111/jmcb.12675
  10. World Bank. (2022). World Development Indicators 2022. Washington, DC: World Bank. doi:10.1596/978-1-4648-1909-1
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Circular Flow Model. (2022, December 23). GradesFixer. Retrieved December 5, 2023, from
“Circular Flow Model.” GradesFixer, 23 Dec. 2022,
Circular Flow Model. [online]. Available at: <> [Accessed 5 Dec. 2023].
Circular Flow Model [Internet]. GradesFixer. 2022 Dec 23 [cited 2023 Dec 5]. Available from:
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