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CA Foundation · Business Economics · Determination of National Income

In a three-sector closed economy, household saving is ₹500 crore, taxes are ₹300 crore, planned investment is ₹350 crore and government purchases are ₹400 crore. In circular flow terms, what is the position of the economy?

Leakages of ₹800 crore (saving 500 plus taxes 300) exceed injections of ₹750 crore (investment 350 plus government purchases 400). Because withdrawals from the flow are greater than additions, aggregate demand is insufficient and national income tends to fall toward equilibrium.

  1. AInjections of ₹750 crore are less than leakages of ₹800 crore, so income tends to fallCorrect
  2. BInjections of ₹800 crore exceed leakages of ₹750 crore, so income tends to rise
  3. CInjections equal leakages at ₹800 crore, so the economy is in equilibrium
  4. DInjections of ₹750 crore exceed leakages of ₹700 crore, so income tends to rise

Explanation

Leakages = saving + taxes = 500 + 300 = 800. Injections = investment + government purchases = 350 + 400 = 750. Since injections are below leakages by 50, planned spending is less than income and national income tends to fall until they equalise.

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