Question

What are examples of withdrawals from the circular flow of income? Cheak all that apply.

Answer 1

Answer:

1. Sharp increase in taxes affects middle-class families

2. A sports-apparel company cuts jobs as a result of slow sales

3. A fast food chain goes out of business and shuts down all of its restaurants.

Explanation:

The circular flow of income shows the flow of money from economic activities between households and firms. Households receive payments for their services in the form of wages and salaries and use this money to purchase goods and services for consumption from the firms. The firms can use their sales revenue and profits to pay for wages and salaries. This continues in a cycle.

There are injections into and withdrawals out of the circular flow of income. Withdrawals (leakages) can occur in the form of savings, taxes and imports.

1. When there is a sharp increase in taxes, people spend more of their income on paying their taxes. Hence, they have little remaining of disposable income to spend on consumption.

2. When a sports-apparel company cuts down on jobs, many people will lose their salaries or wages. Hence, they would be unable to spend on goods and services produced by the firm. This in turn means lower sales revenue for the firm.

3. As a fast food chain shuts down its operation, a lot of suppliers will lose their sales. At the same time, employees would lose their income. Hence, it is a form of leakage from the circular flow of income.