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Circular Flow of Income (Bath (How does a government attempt to achieve…
Circular Flow of Income
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Bath
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If the taps are not on and the plug is in, the economy is in equilibrium.
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Multiplier
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Any injection into the economy will raise the income of the producers making the goods and services, and this income will be spent in the economy.
Whatever is not spent own withdrawals, will continue to circulate in the economy. This will lead to further of income and spending.
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Whilst and Injection increases the income in the economy, there can be a fall in the economy's income if the injections fall.
The Multiplier effect depends on the MPC, MPS and MPT
If the government gets its calculations incorrect, it may overstimulate the economy and in effect, the bath overflows.
The economy is 'overheating' and demand is growing faster than supply creating an increase in prices to ration the additional demand, i.e. inflation.
One of the reasons why the calculation may be incorrect is that there is always a significant time lag between any injection/withdrawal and the overall and final effect
During that time many other variables may also change, altering the effect of the injection of withdrawal.