Question

Which of the following is NOT an example of leakage from the circular flow of income?

• A. Savings
• B. Taxes
• C. Imports
• D. Government spending

Answer 1

The Correct Option is D

Leakages in the circular flow of income are expenditures of income that withdraw funds from the economic system. These are:

• Savings: Funds set aside by households or firms that are not spent on goods or services.
• Taxes: Payments made by households and firms to the government, reducing disposable income available for consumption or investment.
• Imports: Expenditures on goods and services produced in other countries, leading to an outflow of domestic currency.

Conversely, Government spending represents an injection, not a leakage. This occurs when the government injects funds into the economy through purchases of goods and services or by providing subsidies, thereby boosting economic activity. Consequently, Government spending is the item that is NOT an example of leakage from the circular flow of income.