The figure given below represents the leakages and injections in an economy. Figure 10.3 In the figure:
S₁ and S₂: Saving functions
I: Investment
G: Government spending
EX: Net exports
Refer to Figure 10.3.If saving is represented by S₁, at a real GDP level of $500:

Question

The figure given below represents the leakages and injections in an economy. Figure 10.3

In the figure:
S₁ and S₂: Saving functions
I: Investment
G: Government spending
EX: Net exports
Refer to Figure 10.3.If saving is represented by S₁, at a real GDP level of $500:

Quizplus · Accepted Answer

At a real GDP level of $500, the saving function S₁ intersects the 45-degree line at a point where leakages (saving + taxes + imports) are greater than injections (investment, government spending, and exports). This creates a negative output gap, meaning the actual GDP is below the potential GDP. This will lead to a decrease in income as businesses will cut back production and employment, in response to the weak demand for goods and services.

The Figure Given Below Represents the Leakages and Injections in an Economy