Question

What changes in "The Complete Circular Flow" if the government takes in more revenue than it spends? Explain the changes as they cascade throughout the circular flow diagram. Who "wins" and who "loses," if anyone?

Answer 1

Government levy taxes on household and firms and provide certain benefits.The government investment is known as injection and saving,taxes are leakages. If leakages are more means revenue is more and injections are less means spending is less and the level of national output will fall.

The circular flow diagram shows how the economy functions.It shows how money goods and services move in the economy.In the economy there are households and firms . Households represent consumers and firms represent producers.Households consume the goods produced by the firms and offer factors of production to the firms.The firms take the factors of production from the households and produce the goods that consumers want.Firms sell goods and services to households and earn revenue.Firms pay wages, interest etc to households for use of factors of production.Governments levy taxes on households and firms in order to give certain benefits to everyone.So the circular flow model shows leakages and injections in the economy.It shows where money goes and what it is exchanged for.There is also the banking sector which helps in exchange of money.So goods and services flow in the economy in one direction and money flows in another direction.

Producers and consumers are at the center of the market system.All of us are consumers and those who are employed are also producers.We provide our labour to produce goods and when we use our money to purchase goods we are consumers.So there is flow of money between the household and firms and neither win or lose..