Changes in Leakages and Injections

Question 1

Explain what causes disquilibrium by involving the financial sector, households and firms

Answer 1

equlibrium of these sectors is when Y = C + S
If any factor increases like for example investment increase: C + I > Y.
A change in investment in this case is an injection into the economy but it offsets the leakages. This means that the other factors (income and consumption) will have to increases until equilibrium is reached again at a higher level when sum of income = sum of output = sum of equlibrium

Question 2

What happens if Y > C + S

Answer 2

less goods and services will purchased so firms will cut output as they notice stocks (unsold goods) rise
they may lay of employees which means agg income will fall -> so will spending ans will savings in the next period.
income will fall until it is = C + S