CSEET · Economic and Business Environment · National Income Accounting and Related Concepts
In a two-sector circular flow with saving by households and investment by firms, the economy's income level stays stable when:
Income stays stable when saving equals investment. Saving is a leakage from the circular flow and investment is an injection into it. When they are equal, the amount withdrawn is fully replaced, so the total flow of income remains unchanged.
- ASaving equals investmentCorrect
- BSaving exceeds investment
- CInvestment exceeds saving
- DConsumption equals zero
Explanation
Saving is a leakage and investment is an injection. When the two are equal, the leakage is exactly offset by the injection, so the flow of income neither shrinks nor expands. If saving exceeds investment, the flow contracts, so that option is wrong.
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