Question

Both injections into and withdrawals out of 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 and 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 withdrawals from the circular flow of income? Check all that apply.

A sharp increase in taxes affects many middle-class families.
A sports-apparel company cuts jobs as a result of slow sales.
A fast-food chain goes out of business and shuts down all of its restaurants.
Most of the stores at a mall are promoting sales to encourage new customers.
Crew members are hired for a movie company that is shooting on location.

Answer 1

Selections: 1, 2, and 3.

- A sharp increase in taxes — taxes are a leakage (money withdrawn from households to government).
- Company cuts jobs — job losses reduce wages and household spending, withdrawing income from the flow.
- Fast-food chain closes — shutdown causes lost wages and lower spending, a withdrawal.

The mall sales and the movie hires increase spending/income, so they are injections, not withdrawals.