Inquiry case example - Impact of a pandemic on the circular

flow of income
The European Union is on course for a significant
macroeconomic contraction as a result of the Covid19
pandemic. Economies across Europe have experienced a
‘double hit’. Lockdowns across the continent have led to
a huge fall in consumer spending on the one hand, with
an equally steep fall in output because people cannot go
to work. Add a huge decline in business investment and
you can see the flow of income, output and expenditure
is going to fall in all European nations. Christine Legarde,
the head of the ECB has said the eurozone will see a 15%
collapse in output between April and June 2020.
Governments have responded with massive increases in
their spending to try and counter the economic crisis.

Questions
a. Explain what the circular flow of income shows. [4]
The circular flow of income shows that in any given time period, the total output yielded is equal to the total
income generated.

b. Explain two effects of the Covid19 pandemic that might reduce the value of output and
expenditure in the circular flow of income of a country. [4]

1. Lockdown prevents consumers from purchasing goods, which results in a significant decline in the
aggregate demand of the good in the country
2. Decrease in demand results in rising unemployment, which cuts off the income of those who were unemployed