2.4.2 Injections and withdrawals Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. An injection into the circular flow of income is:

   • spending that adds to the flow, such as investment, government spending or exports
   • imports of goods and services from abroad
   • spending that removes money from the flow, such as savings and taxes
   • money that is paid to households as wages and profit

2. Which of the following is a withdrawal from the circular flow?

   • government spending on hospitals
   • investment by firms in new equipment
   • exports of goods to foreign buyers
   • saving by households in a bank account

3. The three main withdrawals from the circular flow of income in an open economy are:

   • investment, government spending and exports
   • exports, imports and investment
   • consumption, transfers and exports
   • saving, taxation and imports

4. Which of these would reduce the size of the circular flow, all else equal?

   • a rise in investment by firms in new equipment, which injects spending into the circular flow and raises the level of income
   • a rise in government spending on infrastructure projects, which adds to income and so increases the size of the flow overall
   • a rise in exports to overseas markets, which brings foreign spending into the economy and raises income for domestic households
   • a rise in the marginal propensity to save, so households spend less of their income

5. If injections exceed withdrawals in an economy, what is likely to happen to national income?

   • national income falls, since the price level must rise
   • national income falls as firms cut production to match spending
   • national income rises as the additional spending increases output and incomes
   • national income is unchanged, because injections and withdrawals always offset

6. A country's savings are 50 billion, taxes are 80 billion and imports are 120 billion. What are the total withdrawals?

   • 350 billion
   • 150 billion
   • 250 billion
   • 130 billion

7. A country has investment of 60 billion, government spending of 90 billion and exports of 130 billion. What are total injections?

   • 190 billion
   • 340 billion
   • 280 billion
   • 220 billion

8. Why is investment treated as an injection rather than a withdrawal in the circular flow?

   • Investment is an import, so it always leaves the domestic economy because most capital goods are bought from overseas suppliers
   • Investment is saving in disguise, which removes income from firms because money in capital projects is no longer spent
   • Investment is a payment to households, which takes money out of the flow because wages are withdrawn from firms' accounts
   • Investment is spending by firms on capital goods, which adds to demand for output and income

9. Which statement about savings as a withdrawal is most accurate?

   • Savings are a withdrawal in all cases, regardless of how banks lend them out, because money placed in any institution is lost
   • Savings are a withdrawal only if they are not re-injected through borrowing and investment by firms
   • Savings have no effect on the circular flow because they are not spent, so holding money in a bank leaves income flows unchanged
   • Savings are always an injection because banks lend them to households, so every pound saved is immediately spent on goods

10. An economy with a balanced circular flow has injections equal to withdrawals. What does this imply?

    • the economy has no government sector and no trade in goods, so the flow contains only households and firms in a two-sector setting
    • the circular flow is in equilibrium, with no tendency for national income to rise or fall
    • national income must be growing at its maximum rate, since equal injections and withdrawals let output expand as fast as possible
    • consumption is zero because all income is withdrawn by saving, taxes and imports, leaving households with no spending

11. A rise in import spending, with exports unchanged, is most likely to:

    • reduce taxes paid by households to the government
    • increase withdrawals from the circular flow, reducing domestic demand for UK output
    • leave the circular flow unchanged because imports are not spending
    • increase injections into the circular flow, raising domestic output

12. Which is the most likely effect of a rise in government taxation on the circular flow?

    • a rise in withdrawals, which reduces the flow of spending and income
    • no effect, because taxes are paid back to households as transfers
    • a rise in injections, which increases the flow of spending and income
    • a fall in withdrawals, because the government holds more money

13. Which of the following best explains why exports are an injection into the circular flow?

    • Foreign spending on UK goods and services creates income for UK firms and households
    • Exports are a payment for imports and so cancel out the circular flow
    • Exports take money out of the UK economy to pay foreign producers
    • Exports reduce UK output because UK firms must supply foreign buyers

14. Which of these best describes a leakage in the circular flow?

    • any transfer of income between households in the same economy, such as pensions and gifts, which stays within the domestic flow
    • any income that leaves the domestic circular flow, such as saving, taxes or imports
    • any spending that raises the domestic price level, which leaks as firms pass higher costs on to households through prices
    • any increase in government borrowing from domestic banks, which moves money from the private sector to the public sector

15. Which statement best evaluates the view that injections always raise national income?

    • Injections raise income only if they are not offset by withdrawals, and they may also raise prices if the economy is near capacity
    • Injections never raise national income because they are always matched by imports, so extra spending leaves the economy
    • Injections always raise national income, regardless of withdrawals or the level of output, because extra spending adds to output
    • Injections raise income only in economies with no households, because household spending is always offset by lower saving

16. A fall in investment by firms, with all else equal, is most likely to:

    • increase withdrawals, raising the flow of spending
    • leave the flow unchanged because investment does not affect firms
    • increase an injection, raising the flow of spending in the economy
    • reduce an injection, lowering the flow of spending and income in the economy

17. A government budget surplus, with all other flows unchanged, implies that:

    • the national debt must rise by the amount of the surplus
    • the government is a net withdrawal from the circular flow, reducing spending
    • the government is a net injection into the circular flow, raising spending
    • the circular flow is unaffected because surpluses are not part of it

18. Savings can be re-injected into the flow through investment. This means that saving:

    • does not always reduce spending, because banks may lend savings to firms for investment
    • cannot affect investment in any circumstance
    • increases consumption directly without any change in investment
    • always reduces national income permanently, whatever banks do with the savings

19. Which change would most likely increase the injection from UK exports?

    • a fall in world demand for UK goods and services
    • a fall in the sterling exchange rate that makes UK goods cheaper for overseas buyers
    • a rise in the sterling exchange rate that makes UK goods dearer for overseas buyers
    • a rise in UK import tariffs that reduces spending on imported goods

20. Government spending is 40 billion and tax revenue is 35 billion. What is the net injection from the government sector?

    • -5 billion
    • 40 billion
    • 75 billion
    • 5 billion

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