Question

Which best describes why taxes and savings are considered leakage factors?

Answer 1

b) They take money out of the economic system.

Answer 2

The correct answer is the second (B).

Taxes and savings deposits draw currency from the economy's circulation. This means that less money will circulate in the economy, reducing consumption and cooling economic activity. Hence, the term "leakage factors" is as if money leaked out of the economy, momentarily in the case of savings and indefinitely in the case of taxes collected. This is because, depending on your view on the fiscal scenario, the Government may decide not to put the money back into the economy.