Injections And Withdrawals

December-01-08
8:29 AM

Injections and Withdrawals

Injections - add to main income spending stream in economy (I,G,X)

Withdrawals - outward flows of funds. Divert funds from the income-spending stream (Savings, Taxes,
M)

Investments and Savings

- Most funds are borrowed by businesses for investments

- Companies keep a portion of their profits to reinvest
- Governments also borrow money - more government borrow, the less ends up with businesses
- Foreign flows

Government purchases and taxes

- Usually government purchase exceeds taxes

- To make up - governments borrow funds in financial markets
- Recent years - T >G, governments - use these excess funds to pay off some of their outstanding debts.

Exports and Imports

- Money spend on imports > exports

- Foreign lenders typically provided funds to Canadian financial markets, with lending by foreigners being
greater than borrowing by foreigners
- This surplus of lending by foreigners has helped make up the shortfall in net exports

Total Injections and Withdrawals

- Total injections. I (I-Planned investments) + g + x

- Total withdrawals: S + T + M
- When total injections exceed total withdrawals, flows into the income-spending stream > flows out. This
implies that real output and spending in the economy expand
- When total withdrawals exceed total injections, flows into the income-spending stream are less than
outflows. The income-spending stream falls and slows down. This implies that real output and spending
in the economy contract.
- Equilibrium : Total injections = total withdrawals

AS

Price Level (GDP Recessionary Gap

DEFLATOR)

AD

Potential Output

Real GDP

Unit 3 - Fiscal Policy Page 1

 Equilibrium VS Potential Output

Recessionary Gap - is the amount by which equilibrium output falls short of potential output
- If equilibrium output is below its potential level, unemployment is above the natural unemployment
rate. (The difference between the equilibrium output and potential output is the RECESSIONARY GAP.

Inflationary Gap- is the amount by which equilibrium output exceeds potential output
- If equilibrium output is above its potential output, unemployment is temporarily below the natural
unemployment rate
- When equilibrium output > potential output - inflationary GAP

AD3

AS
AD 1
PRICE LEVEL AD2

Inflation Gap

Recessionary Gap

Equilibrium
REAL GDP

10.3 Practise Questions

1. -
a. Surplus, Inflation gap, economy expands
b. Recessionary gap, deficit
2. -
a. IGX, STM
b. Yes
3. -
a. Below
b. Above
c. Higher

Unit 3 - Fiscal Policy Page 2