Injection of money stock into the economy will lead to a reduction in interest rate which stands as a proxy for withdraw. A reduction in interest rate will however result in an increase investment which implies increase in output and income. An increase in interest rate will lead to a decrease in GDP.
What is meant by withdrawal and injections in circular flow of income?
Adding Up the Factors The circular flow of income for a nation is said to be balanced when withdrawals equal injections. That is: The level of injections is the sum of government spending (G), exports (X), and investments (I). The level of leakage or withdrawals is the sum of taxation (T), imports (M), and savings (S).
What is spare capacity in the economy?
Spare capacity measures the extent to which an industry, or economy is operating below the maximum sustainable level of production – there are spare factor resources of land, labour and capital.
What are the disadvantages of spare capacity?
Disadvantages
- Negative effect on quality (possibly)
- – Production is rushed.
- – Less time for quality control- less time for making sure the product is perfect.
- Employees suffer.
- -Added workloads and stress.
- -Demotivating if sustained for too long.
- Loss of sales.
- -Less able to meet sudden or unexpected increases in demand.
What can cause spare capacity?
AS Macro Key Term: Spare Capacity
- There are several reasons why a business will operate with spare capacity: Lower demand:
- Increase in capacity not yet matched by increased demand. – Possibly because new technology has been introduced in anticipation of higher demand in the future.
- Provide some “slack”
- Inefficiency.
What happens when there is no spare capacity in the economy?
A shortfall of demand results in spare capacity and places downward pressure on inflation, while an excess of demand results in capacity becoming constrained, placing upward pressure on inflation. A key indicator of spare capacity in the economy is the unemployment rate.
