Which best describes why taxes and savings are considered leakage factors?

Which best describes why taxes and savings are considered leakage factors?

A. They take money out of households.

B. They take money out of the economic system.

C. They take money out of the economic sectors.

D. They take money out of the financial sector.

Answer: B. They take money out of the economic system.

Taxes and savings are categorized as leaders since they cause money to temporarily leave the circular flow of income and expenditure in an economy. This idea is quite important when considering the flow of money within the context of the economic processes, with corresponding measures that might affect the economy as a whole. When people and companies make their tax payments, that money goes to the government and is thus not circulating in the economy to spend freely in the private sector. In the same manner, whenever people store cash, this is taken out of the active circulation of the economy for some time. For instance, when a person grosses up to $1000, he pays $200 in taxes and saves $100, out of this only $700 goes directly into the economy in the form of spending. Through this reduction in spending money available, there is a possibility that the economic activities within that specific period will be somewhat hampered. However, it is useful to underline that these leakages are not permanent, they exist only during a definite period. The money collected by the government in taxes or issued by the bank in loans can provide this money back into the economic cycle, a procedure referred to as injection. It is worth noting that the levels of leakage and injection are prominent in generating economic growth and stability. Knowledge of these factors assists policymakers and other economists in interpreting and forecasting the economy’s state and developing methods of maintaining a balanced economy.