Suppose households had an income of ₹5000 out which they saved ₹2000. After some time, they reduced the amount of savings by ₹ 500. What will be its impact on the circular flow of income?
Answer & explanation
Correct answer: option 1
The correct answer is option 1: Injection
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In the circular flow of income, savings are considered a withdrawal or leakage from the economy because they reduce the amount of income spent on goods and services.
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In this case, households initially saved ₹2000, but later reduced their savings by ₹500, meaning they are now spending ₹500 more.
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This increase in spending (or reduction in leakage) results in more money circulating in the economy, which is considered an injection into the circular flow.