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Which of the following is a leakage (OUTFLOWS) in the economy as shown in the circular flow of MACROECONOMICS

A. Imports
B. Government spending
C. Investments
D. Exports

1 Answer

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Final answer:

Imports are a leakage in the macroeconomic circular flow because they represent spending on goods produced outside the domestic economy, contrary to government spending, investments, and exports, which are injections.

Step-by-step explanation:

In the circular flow of macroeconomics, leakages or outflows from an economy refer to any use of income that does not result directly in immediate domestic spending on goods and services. Among the options given, imports (A) are considered a leakage in the economy because they represent spending on foreign-produced goods, which transfers income out of the domestic economy. This is in contrast to government spending (B), investments (C), and exports (D), which are all inflows or injections that contribute to the domestic economic activity. According to the information provided, essentially, the trade deficit (imports minus exports) and government borrowing (government spending minus net taxes) can be sources of demand for financial capital. These factors strongly influence the national saving and investment identity and the macroeconomic equilibrium.

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