Looking at the circular flows model how can the saving equal

Looking at the circular flows model, how can the saving equals investment equation be derived?

A. By looking at flows into and out of goods markets

B. By looking at flows into and out of financial markets

C. By looking at flows into and out of households

D. By looking at flows into and out of firms

E. By looking at flows into and out of the government

Solution

Looking at the circular flows model, how can the saving equals investment equation be derived?

B. By looking at flows into and out of financial markets

In the financial sector

In terms of the circular flow of income model the leakage that financial institutions provide in the economy is the option for households to save their money. This is a leakage because the saved money can not be spent in the economy and thus is an idle asset that means not all output will be purchased. The injection that the financial sector provides into the economy is investment (I) into the business/firms sector.