Budget deficit boosts government injections in circular flow

Steps:

• Recall circular flow model: income circulates between households and firms, expanded by injections (investment, exports, government spending) and reduced by withdrawals (savings, imports, taxes).
• Analyze options: identify which increases injections or decreases withdrawals to expand total flow.
• Link budget deficit to higher government spending exceeding taxes, adding net injections.
• Conclude A uniquely expands flow among choices.

Why A is correct:

• Budget deficit means government spending > tax revenue, increasing injections into circular flow per the model's definition of fiscal policy effects.

Why the others are wrong:

• B: Higher interest rates boost savings, a withdrawal that contracts the flow.
• C: More imports raise withdrawals, leaking income abroad and shrinking the flow.
• D: Exchange rate increase (appreciation) reduces export competitiveness, lowering injections from net exports.

Final answer: A