Question

Mention any two money flows in circular flow of income in mixed capitalist closed economy. State the condition to ensure equilibrium with reference to the economic variables in this model.

Answer 1

Two examples of money flows in a mixed (i.e., with government) closed economy are:

• Factor incomes (wages, rent, interest, profits) paid by firms to households (a money flow from firms to households).
• Taxes (T) collected from households and firms by the government (a leakage) and/or government purchases (G) paid out to firms and households (an injection).

Equilibrium condition (three‑sector closed economy): total leakages = total injections, i.e. S + T = I + G, where S = saving, T = taxes, I = investment, G = government spending. If S + T > I + G income falls; if S + T < I + G income rises.