ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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injection leaks out of the circular flow of the economy
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injection is maintained in the economy
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imports are injections into the circular flow of the economy
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imports are expensive and so reduce disposable income
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Detailed explanation-1: -Injections and leakages Injections are the introduction of income into the flow, such as additions to investment, government expenditure and exports. Leakages are the withdrawal of income from the flow, such as savings, taxation and imports.
Detailed explanation-2: -Taxes (T) imposed by the government reduce the flow of income. Money paid to foreign companies for imports (M) also constitutes a leakage. Savings (S) by businesses that otherwise would have been put to use are a decrease in the circular flow of an economy’s income.
Detailed explanation-3: -An increase in the marginal propensity to import increases the value of the denominator on the right-hand side of the equation, which then decreases the overall value of the fraction and thus the size of the multiplier.
Detailed explanation-4: -When the MPI decreases, it means the denominator of the Multiplier function will increase. A larger denominator means that the reciprocal will be smaller. Hence the Multiplier will decrease. Therefore, a decrease in the marginal propensity to import makes the Multiplier smaller.