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Injections and Withdrawals

Injections such as consumer spending, investment, government spending, and exports add funds to the income-spending stream in the economy. Withdrawals such as savings, taxes, and imports divert funds away from this stream. The economy is in equilibrium when total injections equal total withdrawals. If injections exceed withdrawals, there is an inflationary gap and real GDP exceeds potential output. If withdrawals exceed injections, there is a recessionary gap and real GDP is below potential output.

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11K views2 pages

Injections and Withdrawals

Injections such as consumer spending, investment, government spending, and exports add funds to the income-spending stream in the economy. Withdrawals such as savings, taxes, and imports divert funds away from this stream. The economy is in equilibrium when total injections equal total withdrawals. If injections exceed withdrawals, there is an inflationary gap and real GDP exceeds potential output. If withdrawals exceed injections, there is a recessionary gap and real GDP is below potential output.

Uploaded by

Dynafrom
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Injections And Withdrawals

December-01-08
8:29 AM

Injections and Withdrawals

Injections - add to main income spending stream in economy (I,G,X)


Withdrawals - outward flows of funds. Divert funds from the income-spending stream (Savings, Taxes,
M)

Investments and Savings

- Most funds are borrowed by businesses for investments


- Companies keep a portion of their profits to reinvest
- Governments also borrow money - more government borrow, the less ends up with businesses
- Foreign flows

Government purchases and taxes

- Usually government purchase exceeds taxes


- To make up - governments borrow funds in financial markets
- Recent years - T >G, governments - use these excess funds to pay off some of their outstanding debts.

Exports and Imports

- Money spend on imports > exports


- Foreign lenders typically provided funds to Canadian financial markets, with lending by foreigners being
greater than borrowing by foreigners
- This surplus of lending by foreigners has helped make up the shortfall in net exports

Total Injections and Withdrawals

- Total injections. I (I-Planned investments) + g + x


- Total withdrawals: S + T + M
- When total injections exceed total withdrawals, flows into the income-spending stream > flows out. This
implies that real output and spending in the economy expand
- When total withdrawals exceed total injections, flows into the income-spending stream are less than
outflows. The income-spending stream falls and slows down. This implies that real output and spending
in the economy contract.
- Equilibrium : Total injections = total withdrawals

AS

Price Level (GDP Recessionary Gap


DEFLATOR)

AD

Potential Output

Real GDP

Unit 3 - Fiscal Policy Page 1


Equilibrium VS Potential Output

Recessionary Gap - is the amount by which equilibrium output falls short of potential output
- If equilibrium output is below its potential level, unemployment is above the natural unemployment
rate. (The difference between the equilibrium output and potential output is the RECESSIONARY GAP.

Inflationary Gap- is the amount by which equilibrium output exceeds potential output
- If equilibrium output is above its potential output, unemployment is temporarily below the natural
unemployment rate
- When equilibrium output > potential output - inflationary GAP

AD3

AS
AD 1
PRICE LEVEL AD2

Inflation Gap

Recessionary Gap

Equilibrium
REAL GDP

10.3 Practise Questions

1. -
a. Surplus, Inflation gap, economy expands
b. Recessionary gap, deficit
2. -
a. IGX, STM
b. Yes
3. -
a. Below
b. Above
c. Higher

Unit 3 - Fiscal Policy Page 2

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