In a four-sector open economy, circular flow equilibrium requires that total leakages () equal total injections (). If domestic investment () increases by , government spending () decreases by , exports () rise by , tax revenues () increase by , and imports () remain constant, what change in household savings () is required to maintain equilibrium?
- An increase of Answer
- BA decrease of
- CAn increase of
- DAn increase of
Answer
An increase of in household savings is required.
Circular flow equilibrium holds when total leakages () equal total injections (). The net change in total injections is . For equilibrium to be restored without changing output, total leakages must also increase by . Since tax leakages increased by and imports are unchanged, savings must increase by ().
Step-by-Step Solution
Key Concept
Four-Sector Circular Flow Equilibrium