Stocks and flows

Correct answer: B. Stock and flow

Explanation: Total public debt is the accumulated outstanding liability measured at a particular date, so it is a stock. Fiscal deficit is the excess of government expenditure over receipts during a financial year, so it is a flow. A deficit is period-based even though it changes the debt stock.

Correct answer: A. Capital stock will increase

Explanation: Net investment is gross investment minus depreciation. When net investment is positive, additions to capital exceed the loss of capital through depreciation, so the capital stock increases. The capital stock remains a stock; investment is the flow that changes its level over time.

Correct answer: B. Stock and flow

Explanation: Raw-material stock at the end of the year is the quantity held at a specified date, making it a stock variable. Raw material purchased during the year is an amount acquired over a period, making it a flow. Purchases may alter inventory, but their classification remains flow-based.

Correct answer: A. Flow and stock

Explanation: Gross capital formation records investment and additions to productive assets over the course of a year, so it is measured as a flow. Capital stock at year-end records the amount of capital existing on a particular date, so it is a stock. The timing words determine the classification.

Correct answer: A. Stock and flow

Explanation: Total assets measured on 1 April represent the amount owned by the company at a specific point in time, so they form a stock. Profit earned over the year is measured across a period, so it is a flow. The date and duration indicators make option A unambiguous.

Correct answer: A. Output from a machine and increase in capital stock through investment

Explanation: A machine is a capital stock that helps generate output over a period, so it has a stock-to-flow relationship. Investment is a flow during a period that adds to or expands the capital stock, creating a flow-to-stock relationship. Thus option A correctly shows both directions.

Correct answer: D. Public debt

Explanation: A fiscal deficit is a flow because it is measured for a particular financial year. If deficits continue, the government generally borrows to finance them, and successive borrowing accumulates into the stock of public debt. Thus a continuing deficit can increase public debt, although the exact change also depends on repayments and other adjustments.

Correct answer: C. Adding year-end national wealth to annual GDP

Explanation: National wealth at year-end is a stock measured at a particular date, whereas annual GDP is a flow generated during a year. Adding them directly combines quantities with different time dimensions and units of interpretation, creating a conceptual accounting error. The other options use appropriate time references.

Correct answer: B. Check whether it is income for a period up to that date or truly a balance

Explanation: Income is ordinarily a flow because it is earned over a period, such as a month or a year. A date in the statement may be only the reporting or closing date and does not automatically convert income into a stock. The context must be checked to determine whether the figure is period income or an actual balance available on that date.

Correct answer: B. Check both time reference and nature of change

Explanation: The safest method is to examine both the time reference and what the quantity represents. A stock records a position at a point in time, while a flow records an activity, amount, or change over a period. The same economic area may contain both types; for example, capital is a stock while investment during a year is a flow. Therefore B is correct.

Correct answer: A. A higher capital stock may enable a higher output flow

Explanation: Capital stock consists of productive assets such as machines, buildings, and equipment. A larger or better-quality capital stock can increase productive capacity and therefore may permit a larger flow of output over a period. The word ‘may’ is important because technology, labour, and demand also affect output.