2.4.2 Injections and withdrawals

Question 1

What are injections?

Answer 1

Injections add money into the circular flow of income and increase its size
/Increased government spending
/Increased investment
/Increased exports

Question 2

What are withdrawals?

Answer 2

Withdrawals or leakages remove money from the circular flow of income and reduce its size
/Increased savings by households
/Increased taxation by the government
/Increased import purchases

Question 3

What is the multiplier effect?

Answer 3

The multiplier effect can cause the economy to grow by a greater amount than the size of the injection. E.g. If government spending increases, the money becomes income for households who then spend it purchasing goods/services from firms, who then spend some of it on purchasing raw materials.

Question 4

How is the relative size of the circular flow of income changed?

Answer 4

Changes to any of the factors that influence government spending, investment, consumption and net exports will increase/decrease the relative size of the circular flow of income.