Injections boost the circular flow of income

Steps:

• Identify key elements: circular flow involves income circulating between households and firms, increased by injections (investment, government spending, exports) and decreased by withdrawals (savings, taxes, imports).
• Analyze options: determine if each change adds an injection or a withdrawal.
• Evaluate net effect: increases occur only with net positive injections.
• Select option with pure injection without offsetting withdrawals.

Why D is correct:

• Higher investment is an injection that directly adds to aggregate demand and the circular flow, per the basic circular flow model where I = planned injections.

Why the others are wrong:

• A: Higher imports is a withdrawal (leakage from domestic economy), reducing the flow.
• B: Higher imports (withdrawal) offsets the positive effect of higher investment, yielding no net increase.
• C: Higher taxation (withdrawal) offsets higher investment, preventing a net increase in the flow.

Final answer: D