Answer to Question #113750 in Macroeconomics for Harriet

Question

If injections exceeds withdrawals, will GDP go on rising or will a new equilibrium be reached, if so explain

Answer 1

If injections exceeds withdrawals, GDP will go on rising

Explanation

GDP can be calculated as the sum of consumer spending + government spending + business investment + the sum of exports - (imports +taxes + savings).

Mathematically,

GDP = cash inflow – cash outflow = Injection - Withdrawal

Withdrawal/ Leakages are the sum of savings, taxes and importation by the government. 

Injections are the sum of investment, government spending and exports. 

When withdrawal equal injections, total cash inflow will equal total cash outflow and the economy will be in equilibrium when:

a. total spending equals total output.

b. leakages equal injections.

c. real GDP will not tend to change.

If withdrawals exceed injections, then total output exceeds total spending then we can expect Real GDP to fall.

If total injections in an economy exceed total output (withdrawal), then we can expect level of national income (GDP) to rise.