Question

What does it mean when we talk about leakages in the circular flow? How will the multiplier be affected if people become more pessimistic?

Answer 1

A leakage is, in economics, a diversion of funds from some iterative process.

For example, leakages are the non-consumption uses of revenue, including investments, taxes, and imports, in the Keynesian depiction of the circular flow of revenue and expenditure.

Consumer confidence is the view customers have towards the economy and their own financial position. This outlook may be positive (high consumer confidence) or negative (low consumer confidence) The level of consumer trust will be a major factor deciding consumer willingness to spend, borrow and save. A high degree of consumer trust can induce a higher marginal consumer propensity. A decline in consumer trust is also an indication of a slowdown in the economy.

This is the reason why multiplier be affected if people become more pessimistic.