A model of the economy which shows the flows of goods, services, factors of production and their payment.
Withdrawal/leakage from the circular flow of income ?
Money that leaves the circular flow
Examples: Savings, Tax paid to the government, Money spent on imports
Injections into the circular flow of income?
Money that enters the circular flow
Examples: Capital spending , Government spending , Money spent on exports
The multiplier process is the idea that an increase in AD because of an increased injection (exports, government spending or investment) can lead to a further increase in national income.
The size of the multiplier will be determined by how much of an increase in income people will spend, the marginal propensity to consume (MPC). The lower the leakages, the higher the MPC, the bigger the multiplier.
A negative multiplier effect can also occur i.e. a withdrawal from the economy could lead to an even further fall in income, decreasing economic growth and possibly leading to a decline in the economy. This means that government plans to cut deficits will lead to an even further decrease of the economy.
