Circular Flow of Income

Interactive Macroeconomic Simulation • Explore the relationships between households, firms, and government

Circular Flow Diagram

💰 Current Economic State

Households
$100B
Firms
$100B
Government
$25B
GDP
$225B
🏠
Household Income
Wages & Income $100B
MPC (Spending Rate) 0.80
🏭
Business Activity
Investment Level $30B
Production $100B
🏛️
Government Policy
Govt Spending $25B
Tax Rate 20%
📊
Economic Indicators
Total GDP $225B
Multiplier Effect 5.0x
Velocity of Money 2.25

📈 Try These Scenarios

📉 Economic Recession
Low household income, reduced investment, and decreased government spending
📈 Economic Boom
High consumer confidence, increased investment, and robust government activity
💵 Fiscal Stimulus
Government increases spending and reduces taxes to stimulate the economy
🔒 Austerity Measures
Government cuts spending and raises taxes to reduce deficit

📊 Economic Variables Comparison

💡 Key Economic Insights

The circular flow model demonstrates how money moves through an economy. Households provide labor and resources to firms, who pay wages and profits. This income is then spent on goods and services, creating a continuous cycle.

The Multiplier Effect: When the government increases spending by $1B, it creates more than $1B in economic activity. The recipients spend their income (based on MPC), creating additional rounds of spending. With an MPC of 0.80, the multiplier is 5x, meaning $1B in spending generates $5B in total economic activity!

Key relationships to explore:
• Higher household income → More consumer spending → Increased firm revenue → Higher GDP
• Government spending stimulates demand → Creates jobs → Increases household income
• Taxes reduce disposable income but fund government services
• Investment by firms creates capital and future growth capacity