• Money?can?enter or leave?the circular flow of income in an economy
• Injections?add?money?into the circular flow of income and?increase its size
  • Increased government spending (G)
  • Increased investment (I)
  • Increased exports (X)
• Withdrawals?or leakages?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)

A diagram that shows the injections and withdrawals that influence the relative size of the circular flow of income

Diagram Analysis

• The relative?size of the injections and withdrawals?impacts the size of the economy:
  • Injections > withdrawals = economic growth
  • Withdrawals > injections = fall in real GDP
• Injections?represent new income in the economy
• 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
• 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
  • E.g. An increase in?interest rates?will increase savings (withdrawal), and?reduce consumption?and investment