Chapter 17, Problem 12AA

To determine

To evaluate the leakages out of circular flow of income.

Explanation of Solution

Leakage is commonly used in the Keynesian economic model in terms of a particular representation of the income flow within a system, defined as the circular flow of income and expenditure. This concept of Keynesian economics portrays that governments need to start taking steps to boost their economies by injecting cash into their systems when leakage creates a scarcity of capital. This injection of money can be accomplished by increasing exports to foreign countries, or by borrowing capital from depositors or foreign nations.

Another situation where leakage is important is in a credit development model, which assumes all loans borrowed from a re-deposited bank into the system. That would never happen in the real world, of course, but it makes a clear measurement of the amount of credit generated. In fact, cash leakages occur when banks borrow money but don't re-deposit it. There are also leakages in the form of funds deposited in banks but not loaned out. Cash leakage in this method reduces the credit generating capacity.

Economics Concept Introduction

Introduction: In the Keynesian economic model, leakage is generally used in regard to a specific representation of the income flow within a system, known as the circular flow of income and expenditure.