Ace the HSC Economics Challenge 2026 – Elevate Your Score and Conquer with Confidence!

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What key relationship does the circular flow model highlight between injections and leakages?

Injections always outweigh leakages in a stable economy

Economic equilibrium is reached when injections equal leakages

The choice pointing to the economic equilibrium being reached when injections equal leakages highlights a fundamental concept in the circular flow model. This model illustrates how money moves through an economy by showing the relationships between different economic agents, such as households and firms.

Injections represent the addition of spending into the economy, including investments, government spending, and exports, while leakages signify the money that exits the economic flow, such as savings, taxes, and imports. The relationship between these two concepts is crucial for maintaining economic stability. When injections equal leakages, it indicates that the total money being introduced into the economy matches the total money being withdrawn. This balance is essential for avoiding economic fluctuations and achieving equilibrium, where the level of income, output, and employment remains stable.

If injections exceed leakages, it could lead to economic growth, while a surplus of leakages could result in recession. Therefore, recognizing that equilibrium occurs at the point where these two forces are equal is a core tenet of understanding how economies function according to the circular flow model.

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Leakages can cause inflation if not managed

All economic activities lead to increased leakages

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