Final answer:
When injections are greater than leakages, it leads to an increase in GDP due to the Multiplier Effect, as more money circulates within the economy, stimulating economic growth. The correct answer to the question is B. GDP increases.
Step-by-step explanation:
If injections (inflows) are greater than leakages (outflows), it will lead to an increase in the Gross Domestic Product (GDP). The reason is that injections such as investments, government spending, and exports add to the circular flow of income in an economy, while leakages like savings, taxes, and imports withdraw from it. When injections exceed leakages, there's more money circulating within the economy, which stimulates economic activity and leads to growth. This is also identified by the Multiplier Effect, where an initial increase in spending leads to a larger increase in GDP.
The scenario described is similar to what happens when there's an inflationary gap. When aggregate expenditure is higher than potential GDP, it indicates too much spending chasing too few goods, leading to inflationary pressures. In such cases, as per Keynesian economics, the government should consider either increasing taxes or reducing its expenditures to moderate the level of aggregate spending in the economy, moving towards an equilibrium state where aggregate expenditure equals potential GDP without inflation.