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CircularFlow - Saving Investment& Government • Any...

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Circular Flow Model Assumptions:  Four sectors or participants of every economy are: Households Firms Government , and  International  The ultimate owner of factors of Production,  Labor,  Land, and Capital  is households.   Households trade factors of production  (in resource  market)  with firms in exchange for income.   Households spend their income by buying goods and  services  (in the goods market)  form the firms.   If   Income = Spending , economy is in   equilibrium . The Circular Flow Model of the economy shows how  interactions among participants in an economy affects  the economy.
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Circular Flow Model
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Unformatted text preview: Saving, Investment & Government: • Any flow out of the system, such as Savings and Taxes, are Leakage from the system and have Contractionary Effect on the economy. • Any flow into the system, such as Investment and Government Spending are Injection to the system and have Expansionary Effect on the economy. • If Leakage > Injection , then Income > Spending and overall effect on the economy is contraction. • If Leakage < Injection , then Spending > Income and overall effect on the economy is contraction....
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