The Correct Answer and Explanation is:
Here are the correct determinations for each example:
- Government spending by the government sector: Injector
- Investments made by the financial sector: Injector
- Taxes collected by the government sector: Leakage
- Savings by individuals outside a bank: Leakage
- Exports purchased by the foreign sector: Injector
Explanation
In macroeconomics, the concepts of injectors and leakages describe the movement of money into or out of the circular flow of income. The circular flow model illustrates how money circulates between households and firms in an economy. Leakages are withdrawals from this flow, while injectors are additions to it.
An injector, or injection, is any form of spending that adds money to the economy’s circular flow. This spending does not originate from household consumption. Government spending (G) is a primary example of an injector because the government uses tax revenue and borrowing to purchase goods and services, paying firms and workers and thus adding to the national income. Similarly, investments (I) by firms in new capital, like machinery or buildings, inject money into the flow by creating income for the producers of those capital goods. Lastly, exports (X) are a crucial injector. When a foreign entity buys domestically produced goods, money from abroad flows into the country, increasing the income of domestic producers.
Conversely, a leakage, or withdrawal, is money that is diverted out of the circular flow, reducing the amount available for immediate spending on domestic goods and services. Taxes (T) are a leakage because they represent money taken from households and firms by the government, which reduces their disposable income and ability to spend. Savings (S) are another major leakage. When individuals save a portion of their income rather than spending it, that money is removed from the active spending stream. This is true whether the savings are in a bank or held as cash. While savings in a bank can be loaned out to become investment (an injection), the initial act of saving is itself a leakage from consumption.
