Explore BrainMass
Share

Saving: Investment in a circular flow

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Why does investment spending not equal saving in the circular flow?

© BrainMass Inc. brainmass.com October 25, 2018, 9:36 am ad1c9bdddf
https://brainmass.com/economics/basic-economic-concepts-and-principles/saving-investment-in-a-circular-flow-579894

Solution Preview

Saving is equal to investment in a simplified circular flow economy without government and no international trade. In this simplified economy, all economic activities are the interactions between households and firms. In this ...

Solution Summary

In a closed economy with government, saving must equal investment. This is because outputs are either consumed by households (consumption) or by firms (investment). Unconsumed income must be equal to saving. It follows that saving is equal to investment. However, in an opened economy with government, the equality doesn't hold because saving and investment are also inclusive of from foreigners and some portion of income goes to taxes as well.

$2.19
See Also This Related BrainMass Solution

what are the "leakages" and "injections"

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

View Full Posting Details