Injections must equal leakages because the amount of money coming into a sector of the economy must equal the amount of money that leaves that sector.
They then take all of the money Injections and leakages come into play when we expand the circular flow model past its basic version.
What is the relationship between leakages and injections?
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 happens if leakages are greater than injections?
When leakages equal injections, total spending will equal total output and the macroeconomy will be in equilibrium. If leakages exceed injections, then total output exceeds total spending and the level of national output (GDP) will fall. Both lead to more spending in the economy and help to increase GDP.
What are the leakages and injections in the circular flow?
Injections into the economy include investment, government purchases and exports while leakages include savings, taxes and imports. Government taxes leak out of the circular flow model, and then government spending injects them back into the economy.
Why are savings leakages?
Leakage matters because it represents revenue lost. It can have many forms; interest rates are just one way for money to leak out of an economy. High taxes can have the same effect, as can excessive saving or higher interest in purchasing imported goods.