Question

Both injections into and withdrawals from the economy can affect the circular flow of income. An injection of new spending increases the flow. For example, if a new toy company opens, then hires workers from the surrounding area, this will increase the flow of wages and consumer spending. On the other hand, a withdrawal decreases the flow. If a car factory shuts down, workers lose their jobs and no longer have a steady source of income to continue to buy goods and services. Not all withdrawals are for negative reasons, however. Households may decide to reduce their spending to save money, which reduces the flow of income in an economy.

–“The Circular Flow of Income”

What are examples of injections into the circular flow of income? Check all that apply.

Most of the workers at a struggling paper company are laid off.
A bank gives its customers savings accounts to encourage saving.
A large media company that is on the rise gives most of its workers raises.
A supermarket chain expands into a number of different communities.
Sales during the holiday season encourage consumers to spend more than normal.

Answer 1

Answers:
- A large media company that is on the rise gives most of its workers raises. (Injection — raises increase households’ incomes and therefore spending.)
- A supermarket chain expands into a number of different communities. (Injection — expansion means new investment, hiring and spending.)
- Sales during the holiday season encourage consumers to spend more than normal. (Injection — higher consumer spending raises the flow of income.)

Not injections:
- Most of the workers at a struggling paper company are laid off. (Withdrawal — lost wages reduce spending.)
- A bank gives its customers savings accounts to encourage saving. (Withdrawal/leakage — increased saving reduces current consumer spending.)