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In the circular flow model of the economy, what are the "leakages" and "injections" (please define, also)?

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1. In the circular flow model of the economy, what are the "leakages?" Define them.

2. In the circular flow model of the economy, what are the "injections?" Define them.

3. Explain why the leakages must equal the injections for the economy to be at equilibrium.

4. When looking at the circular flow model and the equilibrium condition of leakages equaling injections, what would be the effect on the economy if the following were true:

a. Investment spending = $2 billion

b. Government spending = $8 billion.

c. Taxes = $3 billion.

d. Savings = negative $2 billion

e. Imports = $12 billion

f. Exports = $1 billion

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"Unlike savings that are voluntary, government imposes various taxes that reduce income available for household expenditures. Households who pay taxes for transfer payments experience a..."

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1. In the circular flow model of the economy, what are the "leakages?" Define them.

Leakages are simply the income that is not spent on consumption of domestic output e.g., savings. It is the income not passed on by consumers in the circular flow e.g. savings, taxation or money spent on imports and it is not used to buy more goods produced within the country. Leakages are sometimes called withdrawals. Leakages equal to the sum of savings (S), taxes paid to the government (T) and imports (M)

Leakages= S + T + M

Some of the household income is voluntarily saved and is a leakage from the circular flow model. Banks and other financial institutions gather savings in order to make loans to firms and others who wish to borrow. If savings cannot be ...

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Umut Oltulu, MBA
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  • MBA, Texas A&M University-Kingsville
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