Question

2. Draw the circular flow complete with all leakages and injections. Explain how the leakages get injected back into the economy.

Answer 1

The leakages, household savings, and net tax revenue get injected back into the economy through planned investment spending and the government. Savings leak out to borrowers as it goes through the banking system, and borrowers use the money to buy goods and services, which then injects the money back into the circular flow. Government taxes leak out of the circular flow model, and then government spending injects them back into the economy.