The economy will contract (shrink) if leakages exceed injections. Do you agree w

Question

The economy will contract (shrink) if leakages exceed injections. Do you agree with this statement? Why or why not?

My answer am I close?
No I don’t agree with that analysis that the economy will shrink if leakages exceed injections. “According to the video” states that saving (leakage) equals investment spending so saving may be leakages, but if business use investment spending then the leakages will be Macroeconomic equilibrium. So what leaks out will ineviable be returned by business investment.

Explanation / Answer

It sounds like you are on the right track so far! You might want to add that the economy will not shrink if inevitable leakages are profitable or neutral for the business' investments in leakages. If it is profitable the economy will expand and if it is neutral it will stay unchanged. However, if the business' investment leakages end up causing them to lose money it would be equal to causing a shrinking economy.

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