2.4.2 Injections and Withdrawals — Practice Questions

Seven original multiple-choice questions on injections and withdrawals, written to the style and difficulty of Edexcel Paper 2 Section A. One is a calculation.

7 questions Edexcel A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 2.4.2 Injections and Withdrawals revision notes.

1. 1. Table 1 shows four money flows and where each one comes from or goes to.
   Using Table 1, the only flow that is an injection is

   Data interpretation

   Table 1: Four money flows

   	Flow	Source or destination
   Flow 1	Savings	The financial sector
   Flow 2	Investment	The financial sector
   Flow 3	Taxation	The government
   Flow 4	Imports	Overseas

   Select one answer

   A Flow 1.

   B Flow 2.

   C Flow 3.

   D Flow 4.
   Show model answer

   Answer: B (Flow 2.). The financial sector appears twice in the table, once on each side, and that is the point worth noticing.
   Savings leave the circular flow and go into the financial sector, so they are a withdrawal. Investment comes out of the financial sector and back into the flow as spending by firms on capital goods, so it is an injection.
   The same institutions handle both, which is why the direction of travel rather than the counterparty is what classifies a flow.

   Why the other options are wrong

   • A — Savings are income not spent, leaking out of the flow into the financial sector. That makes them a withdrawal.
   • C — Taxation is income paid to the government rather than spent on domestic output, so it is a withdrawal.
   • D — Imports are spending that goes overseas rather than to domestic producers, so the money leaves the flow.

2. 2. In the circular flow model, a leakage is best defined as income that is

   Definition in context

   Select one answer

   A Earned abroad by domestic residents in a year.

   B Paid to households by firms in the form of wages.

   C Spent by firms on new capital goods each year.

   D Withheld from spending on domestic output.
   Show model answer

   Answer: D (Withheld from spending on domestic output.). A withdrawal, or leakage, is income that does not return to domestic firms as demand for what they produce.
   All three withdrawals fit that description. Saving is income held back rather than spent; taxation goes to the government instead; imports are spending that reaches producers abroad. In every case the money leaves the domestic circular flow, so the flow shrinks.
   Note that the money is not destroyed — savings and taxes come back as investment and government spending. But they only do so as injections, which is a separate flow.

   Why the other options are wrong

   • A — Income earned abroad by residents flows into the domestic economy. It is closer to an injection than a withdrawal.
   • B — Wages paid by firms to households are the money flow that keeps the basic circular flow going. They stay inside it.
   • C — Spending by firms on capital goods is investment, which is an injection.

3. 3. Savings flow out of the circular flow into the financial sector, and investment flows from the financial sector back into it. The financial sector therefore

   Applied reasoning

   Select one answer

   A Channels withdrawn income back into the flow.

   B Creates new money that did not exist before.

   C Permanently removes income from the economy.

   D Prevents the circular flow from ever expanding.
   Show model answer

   Answer: A (Channels withdrawn income back into the flow.). Saving and investment are the same money seen at two moments. Households put income aside, banks and pension funds hold it, and firms borrow it to buy capital goods.
   So the financial sector is the link between one withdrawal and one injection. That is why saving is not simply lost to the economy — its effect on national income depends on whether the financial sector passes it on.
   It also explains why a banking crisis is so damaging: savings still leak out, but the channel returning them as investment is blocked.

   Why the other options are wrong

   • B — Commercial banks can create credit, but that is a separate topic. Here the money being invested is money that was saved.
   • C — Saving would only be permanently removed if it were never lent on. The whole point of the financial sector is that it is.
   • D — The flow expands whenever injections exceed withdrawals, and investment is one of the injections that can make that happen.

4. 4. An economy's circular flow is in equilibrium. Investment is £150bn, government spending is £290bn, savings are £180bn, taxation is £300bn and imports are £195bn. Exports must therefore be

   Calculation

   Select one answer

   A £195bn

   B £235bn

   C £440bn

   D £675bn
   Show model answer

   Answer: B (£235bn). Equilibrium means I + G + X = S + T + M, so rearrange for the unknown.
   Withdrawals: £180bn + £300bn + £195bn = £675bn.
   Known injections: £150bn + £290bn = £440bn.
   Exports = £675bn − £440bn = £235bn.
   The check is that injections now total £150bn + £290bn + £235bn = £675bn, matching withdrawals exactly.

   Why the other options are wrong

   • A — £195bn is the value of imports. Exports and imports are separate flows on opposite sides of the equation and need not be equal.
   • C — £440bn is investment plus government spending — the injections already known. Exports are what has to be added to them.
   • D — £675bn is total withdrawals. Exports have to bring injections up to that figure, not equal it on their own.

5. 5. A government cuts income tax rates while nothing else in the economy changes. In terms of the circular flow of income this is

   Applied reasoning

   Select one answer

   A A fall in a withdrawal, so the flow expands.

   B A fall in an injection, so the flow contracts.

   C A rise in a withdrawal, so the flow contracts.

   D A rise in an injection, so the flow expands.
   Show model answer

   Answer: A (A fall in a withdrawal, so the flow expands.). Taxation is one of the three withdrawals, so cutting tax rates reduces a leakage rather than adding an injection.
   Less income leaves the flow, so more of it stays in as consumer spending. With injections unchanged and withdrawals lower, injections now exceed withdrawals and the circular flow expands.
   The outcome is the same as raising an injection would produce, but the route is different — and getting the classification right is what the question is testing.

   Why the other options are wrong

   • B — Taxation is a withdrawal, not an injection. Government spending is the injection, and it has not changed.
   • C — Tax rates have been cut, so the withdrawal falls rather than rising.
   • D — Again, the wrong side of the equation. A tax cut works by reducing what leaks out.

6. 6. An initial injection of £1bn into the circular flow raises national income by considerably more than £1bn. This happens because the money

   Applied reasoning

   Select one answer

   A Is created anew by the banking system.

   B Never leaves the circular flow at any point.

   C Passes on as income and is spent again.

   D Reduces withdrawals by the same amount.
   Show model answer

   Answer: C (Passes on as income and is spent again.). This is the multiplier process. The £1bn is spent, and that spending becomes somebody's income — builders, suppliers, their employees.
   Those recipients spend a proportion of it, set by their marginal propensity to consume, and that spending becomes income for others, who spend a proportion in turn. Each round is smaller than the last, but they add up to considerably more than the original £1bn.
   How much more depends on how much leaks out at each round through saving, taxation and imports.

   Why the other options are wrong

   • A — No new money is being created here. The same pounds are changing hands repeatedly, which is a different mechanism from credit creation.
   • B — Money does leak out at every round, through saving, taxation and imports. That leakage is exactly what limits the size of the multiplier.
   • D — Withdrawals are unaffected as a proportion of income. If anything, higher income generates more saving, tax and imports in absolute terms.

7. 7. Two economies receive an identical injection. One buys a far larger share of its goods from abroad than the other. In the more import-dependent economy the eventual rise in national income will be

   Applied reasoning

   Select one answer

   A Larger, because imports add to the circular flow.

   B Larger, because trade raises national income.

   C Smaller, because more income leaks abroad.

   D The same, because the injection is identical.
   Show model answer

   Answer: C (Smaller, because more income leaks abroad.). Imports are a withdrawal. At every round of the multiplier process, a share of the income being passed on is spent on foreign goods and leaves the domestic circular flow.
   The higher that share, the less is left to become domestic income at the next round, so the rounds die away faster and the total effect is smaller.
   This is why the multiplier tends to be smaller in a very open economy, and it is one reason the same fiscal stimulus does more for output in a large, relatively closed economy than in a small trading one.

   Why the other options are wrong

   • A — Imports take money out of the domestic flow rather than adding to it. They are spending on output produced elsewhere.
   • B — Trade brings real benefits, but that is a separate argument. Within the multiplier process, imports are a leakage.
   • D — The injection is the same, but what happens to it afterwards is not. The size of the leakages determines how far it goes.