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2. Draw the circular flow complete with all leakages and injections. Explain how the leakages get...

2. Draw the circular flow complete with all leakages and injections. Explain how the leakages get injected back into the economy.

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Answer #1

Leakages in the economy comprises of taxes, imports and savings whereas injection in the economy comprises of investments, government spendings an exports. For an economy to balance, the leakages must be equal to the injections. In the circular flow of money we can see that, as the leakages take place due to various reasons like savings, taxes, etc., injections also take place simulataneously and keep the circular flow intact. The banking system acts as the mediator of the economy and keeps the injections and leakages in check.

The diagram given below roughly shows the circular flow of money in the economy-

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