In the circular flow model, injections into the economy include investment, government purchases, and exports while leakages include savings, taxes, and imports.
So, what are injections and leakages?
Leakages reduce the flow of income. Injection means introduction of income into the flow. When households and firms borrow the savings, they constitute injections. Injections increase the flow of income.
What are leakages in the circular flow of income?
The model is best viewed as a circular flow between national income, output, consumption, and factor payments. Savings, taxes, and imports are “leaked” out of the main flow, reducing the money available in the rest of the economy.
What is the circular flow of income?
The circular flow of income is a neoclassical economic model depicting how money flows through the economy. In its simplest version, the economy is modeled as consisting only of households and firms. Money flows to workers in the form of wages, and money flows back to firms in exchange for products.
What is the factor market?
A factor market is a marketplace for the services of a factor of production. A factor market facilitates the purchase and sale of services of factors of production, which are inputs like labor, capital, land and raw materials that are used by a firm to make a finished product.
What is the Keynesian economic theory?
Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynes advocated increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression.
What is the Keynesian zone?
The short-run aggregate supply, or SRAS, curve can be divided into three zones—the Keynesian zone, the neoclassical zone, and the intermediate zone. Keynes’ Law states that demand creates its own supply; changes in aggregate demand cause changes in real GDP and employment.
What is Say’s law and what does it mean?
Say’s law did not posit that (as per the Keynesian formulation) “supply creates its own demand”. Nor was it based on the idea that everything that is saved will be exchanged. Rather, Say sought to refute the idea that production and employment were limited by low consumption.
What are the economic reasons why the AD curve slopes down?
The wealth effect, therefore, provides one reason for the inverse relationship between the price level and real GDP that is reflected in the downward-sloping demand curve. A second reason is the interest rate effect. As the price level rises, households and firms require more money to handle their transactions.
What would cause the AD curve to shift to the right?
The aggregate demand curve shifts to the right as a result of monetary expansion. In an economy, when the nominal money stock in increased, it leads to higher real money stock at each level of prices. The interest rates decrease which causes the public to hold higher real balances.
What is the IS curve?
The investment/saving (IS) curve is a variation of the income-expenditure model incorporating market interest rates (demand), while the liquidity preference/money supply equilibrium (LM) curve represents the amount of money available for investing (supply).
What causes a shift in the IS curve?
An increase in autonomous money demand will shift the LM curve left, with higher interest rates at each Y; a decrease will shift it right, with lower interest rates at each Y. The IS curve, by contrast, shifts whenever an autonomous (unrelated to Y or i) change occurs in C, I, G, T, or NX.
What is a liquidity trap?
A liquidity trap is a situation, described in Keynesian economics, in which, “after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers [holding] cash [rather than] holding a debt which yields so low a rate of interest.”
Why is there a liquidity trap?
A liquidity trap occurs when low/zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective. In this situation, an increase in the money supply will fail to increase spending and investment because interest rates can’t fall any further.
What is the concept of liquidity trap?
The liquidity trap is the situation in which the current interest rates are low and savings rates are high, rendering monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise.
Is fiscal policy effective in a liquidity trap?
But just how effective is fiscal policy in a liquidity trap? The key insight is that if an economy is in a liquidity trap, nominal interest rates are likely higher than the monetary authorities would like them to be; rates would be lower if not for the zero lower bound.
What is the money illusion?
In economics, money illusion, or price illusion, is the tendency of people to think of currency in nominal, rather than real, terms. In other words, the numerical/face value (nominal value) of money is mistaken for its purchasing power (real value) at a previous point in the general price level (in the past).
What is a menu cost?
In economics, a menu cost is the cost to a firm resulting from changing its prices. The name stems from the cost of restaurants literally printing new menus, but economists use it to refer to the costs of changing nominal prices in general.
What is inflation illusion?
Money illusion is an economic theory stating that many people have an illusory picture of their wealth and income based on nominal dollar terms, rather than real terms. Real prices and income take into account the level of inflation in an economy.
What is price confusion?
Or are prices simply rising? This leads to price confusion – people are unsure of what to do and the price system is less effective at coordinating market activity. Money illusion is another problem associated with inflation. You’ve likely experienced this yourself.
How the money supply in the United States is measured?
There are several standard measures of the money supply, including the monetary base, M1, and M2. The monetary base is defined as the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).
Who is in control of the money supply?
The Federal Reserve directly controls only the most narrow form of money, physical cash outstanding along with the reserves of banks throughout the country (known as M0 or the monetary base); the Federal Reserve indirectly influences the supply of other types of money.
How money is created by banks?
The process whereby banks make loans equal to the amount of their excess reserves and create new checkbook money is known as multiple deposit creation. The deposit creation process is multiplied throughout the entire banking system until all excess reserves have been absorbed into required reserves.
Originally posted 2022-01-07 16:37:36.