Practicing Success

Target Exam

CUET

Subject

Economics

Chapter

Macro Economics: Open Economy Macro Economics

Question:

Which of the following are true-
a) When Indians buy foreign goods, this spending escapes as a leakage from the circular flow of income decreasing aggregate demand.
b) Indian exports to foreigners enter as an injection into the circular flow, increasing aggregate demand for goods produced within the domestic economy.

Options:

Both a and b are true

a is true, b is not

b is true, a is not

Both a and b are false

Correct Answer:

Both a and b are true

Explanation:

Injection means addition to the circular flow whereas, leakage means when flow of income is pulled out of the flow.

The person buying commodity from the foreign market is pulling out the money from domestic market to foreign market, making a leakage in the Indian economy. Whereas, exporting product to the foreign nation adds to the existing flow of money making an injection in the Indian economy.