Question

What is meant by 'leakage' in the context of the multiplier?

Options

• Income that is spent on newly produced goods and services

• Income that is not spent on currently produced consumption goods and services

• Income that is earned through foreign trade

• Income that is invested in government bonds

Answer 1

Income that is not spent on currently produced consumption goods and services

Explanation:

According to Prof. Peterson, a leakage is any income that is not spent on buying newly produced goods and services. Such income "leaks out" of the income stream and reduces the multiplier effect.