The circular flow of income and particular the injections and leakages have a substantial influence on the economic activity of the time. Economic activity is defined as the production and distribution of goods and service in an economy,
Explain how changes in the levels on injections and leakages can change the level of economic activity
The circular flow of income and partrticular the injections and leakages have a substantial influence on the economic activity of the time. Economic activity is defined as the production and distribution of goods and service in an economy, processes like Government expenditure (G), investment (I), exports (X), imports (M), savings (S), and taxation (T) all play an important role in the level of activity within an economy.
Savings is a significant process in the circular flow of income. This process is classified as a leakage as it involves people removing funds which would otherwise be spent. When the leakage is taking place it reduces the amount of money that could be spent on purchasing goods or services. This will result in a drop in demand which will be responded to by a drop in production. This drop in demand and production is otherwise known as a decrease in economic activity. Despite savings resulting in a drop in economic activity it is also the money that funds investment agencies. This means that the savings can be used as finance which may result in economic stimulas.
