It models the basic working of the economy. Resources, income, expenditure and output are shown as flows of money that continuously circulate around the economy
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Where do households pay their income to?
To firms in payment for goods and services and the leakages go in the form of saving, taxes and spending on imports
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What gets injected into the circular flow of income?
Investment, government spending and people abroad spending on our exports
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What are leakages?
They reduce the demand for domestically produced goods and services by diverting part of people's incomes into savings, taxes and spending on imports
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What are injections?
Investment, government expenditure and exports which increase demand for domestically produced goods and services
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What happens to the economy if leakages are greater than total injections?
Incomes and spending will start to fall
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What happens to the economy if total injections exceed total leakages?
There will be stimulus to the economy, spending will rise and total income will increase
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What is aggregate demand?
The sum total of demand from all sources in the economy
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