Question

Which of the following is NOT an example of leakage from the circular flow of income?

• A. Savings
• B. Taxes
• C. Imports
• D. Government spending

Answer 1

The Correct Option is D

Leakages in the circular flow of income refer to withdrawals of money from the economy, such as savings, taxes, and imports. These reduce the overall economic activity. Government spending, on the other hand, is an injection, meaning it adds money into the economy, stimulating demand.

Answer 2

Leakages in the circular flow of income refer to withdrawals of money from the economy, which can reduce the overall level of economic activity. These leakages include savings, taxes, and imports, all of which take money out of the flow.

Savings occur when individuals or households choose to save part of their income rather than spending it on goods and services, leading to a reduction in consumption.

Taxes represent money that the government takes from individuals and businesses, which, while necessary for funding public services, can reduce the amount of money available for consumption and investment in the economy.

Imports refer to money spent on goods and services from foreign countries, which leaves the domestic economy and does not contribute directly to local production.

In contrast, injections into the circular flow, such as government spending, investment, and exports, add money into the economy, stimulating demand and economic activity. Government spending, for example, can increase demand for goods and services, creating jobs and boosting income, thus encouraging further spending and investment. These injections help counterbalance the effects of leakages and stimulate economic growth.