A) The impact of injections into, and withdrawals from, the circular flow of income
Injections
This is money entering the economy. When injections are greater than withdrawals the amount of money in the circular flow increases, resulting in economic growth. The 3 types of injections include:
- Government spending
- Investment
- Exports
Withdrawals
This is money which is leaving the economy. When withdrawals are greater than injections the amount of money in the circular flow decreases, resulting in a fall in real GDP. The 3 types of withdrawals include:
- Savings
- Taxation
- Imports
Policy decisions can have a big impact on the circular flow and therefore economic growth. For example, a decrease in interest rates is likely to encourage firms to increase investment. This is due to the fact that they can now borrow money at a lower rate of interest, thus reducing the cost of borrowing. Therefore, firms will decide that it is best for them to invest whilst interest rates are low. This will cause investment to increase and therefore the injections into the circular flow to increase also. In addition to this, a decrease in interest rate reduces the reward for those who save their money. This is because they will earn less interest on the money they save. Therefore, consumers will be encouraged to spend their money, keeping it in the circular flow of income. This will cause a reduction in the amount of withdrawals from the circular flow of income. Both of these factors should help to increase the money in the circular flow, as the value of injections is likely to be greater than the value of withdrawals. Overall this will result in an increase in economic growth.