injections and withdrawals into the circular flow

Question 1

how are injections represented

Answer 1

Injections represent new income in the economy

Question 2

what are withdrawals ?

Answer 2

Withdrawals are the leakage of money from the economy

Question 3

what do injections do ?

Answer 3

Injections add money to the circular flow of income and increase its size

Increased government spending (G)
Increased investment (I)
Increased exports (X)

Question 4

what do Leakages do?

Answer 4

Leakages (withdrawals) remove money from the circular flow of income and reduce its size

Increased savings by households (S)
Increased taxation by the government (T)
Increased import purchases (M)

Question 5

what happens when injections are greater than leakages ?

Answer 5

If the injections > leakages, national income will increase and the economy will grow

Question 6

diagram analysis of the circular flow of income (Injections and leakages)

Answer 6

Government: Government spending (G) is an injection and taxation (T) is a leakage
Financial sector: Investment (I) is an injection and savings (S) is a leakage
Foreign sector: Exports (X) is an injection and imports (M) is a leakage

The relative size of the injections and withdrawals impacts the size of the economy
Injections > withdrawals = economic growth and increase in national income
Withdrawals > injections = economic decline and a fall in national income

Question 7

what happens when there are any changes to any of the factors of the AD equation?

Answer 7

Changes to any of the factors that influence government spending, investment, consumption and net exports will increase or decrease the relative size of the circular flow of income
E.g. An increase in interest rates will increase savings (withdrawal) and reduce consumption and investment

Question 8

EXAM TIP

Answer 8

Remember to consider the net effect and proportionality of the injections and withdrawals. For example, if the size of government spending is large, it is likely to completely outweigh the combined withdrawals of savings and imports.

The size of the multiplier is dependent on the marginal propensity to consume (MPC), the marginal propensity to save (MPS), the marginal propensity to import (MPM), and the marginal propensity to be taxed (MPT)

Question 9

what does the determinants of savings refer to?

Answer 9

The determinants of savings refers to the factors that influence an individual (household) decision to save money rather than consume it immediately

Question 10

what can individuals do with their disposable income ?

Answer 10

Disposable income can either be saved or spent on goods/services (consumption)
When savings decrease, consumption usually increases
When savings increase, consumption usually decreases

Question 11

what does the households savings ratio calculate?

Answer 11

calculates household savings as a proportion of household income
This percentage is often low when an economy is booming and full of confidence - and vice versa
During lockdown in 2020 this ratio reached a record high in the UK of around 25%

Question 12

what is the difference between savings and investment ?

Answer 12

Savings is the portion of income by households that is not spent / consumed

Investment is expenditure by firms on capital goods eg. machinery and equipment. The spending is geared toward enhancing productivity
Firms can also save profits, without spending them

Question 13

where is equilibrium of national income level?

Answer 13

The equilibrium national income level is where withdrawals are equal to injections
This is also where aggregate demand is equal to aggregate supply

Question 14

what is full employment?

Answer 14

Full employment is the level of income at which an economy is operating at full capacity
It is operating on its production possibility frontier with no spare capacity

Question 15

t is