Leakages in the circular flow of income include:
Options
AInvestment
BExports
CSavings
DGovernment Spending
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Determination of National IncomeMTP - June 2023 (Inter)Question 111 of 20
All Questions Correct Answer
✅ Option c — Savings
All Options:
- AInvestment
- BExports
- CSavings
- DGovernment Spending
Detailed Solution & Explanation
To understand leakages in the circular flow of income, we need to consider the basic concept of how income flows through an economy.
• The circular flow of income model shows how income is earned and spent by households and businesses.
• In this model, leakages refer to the amount of income that is not spent on consumption or investment, but rather taken out of the circular flow.
• Savings are a key example of a leakage, as they represent income that is not spent on goods and services, but rather set aside for future use.
The correct answer is right because savings reduce the amount of income available for spending, thereby reducing aggregate demand.
• On the other hand, investment is actually an injection into the circular flow, as it represents spending by businesses on capital goods.
• Government spending is also an injection, as it represents spending by the government on goods and services, and is not a leakage.
About This Chapter: National Income
Paper
Paper 4: Business Economics
Weightage
15%
Key Topics
Aggregates, Measurement, Keynesian Theory
A crucial chapter covering national income aggregates like GDP, GNP, NDP, NNP, and the methods of measuring national income (Income, Expenditure, and Output methods). It also introduces Keynesian Theory including the concepts of Aggregate Demand, Consumption Function, and the Multiplier.
View Official ICAI SyllabusExam Strategy Tip
Practice numerical questions on GDP/GNP calculations and the Multiplier. These are guaranteed marks in every exam. Also understand the circular flow of income clearly.
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