Distinguish between leakages and injections in the circular flow of income and consider how they might be related.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2019). The mark or mark type is shown in brackets.

1. [12] Answers should identify each of three leakages and each of three injections into the circular flow of income.
2. [12] The key distinction should focus on the autonomous nature of the injections and the endogenous nature of withdrawals.
3. [12] A diagram might be used to demonstrate this distinction.
4. [12] Some attempt should be made to show how an injection might affect a leakage or vice versa. For example, an increase in investment (injection) might lead to an increase in income, which might lead to an increase in savings (withdrawal).
5. [9-12] L4: for a detailed explanation of the differences between leakages and injections and a clear attempt to discuss whether, or in what circumstances, changes in one might cause changes in the other. Good answers will refer to at least two examples of situations which might arise which support the idea that leakages and injections are related.
6. [7-8] L3: for an answer which clearly identifies leakages and injections and makes some attempt to establish differences. A diagram might be provided. A limited attempt might be made to show how these might be related.
7. [5-6] L2: for an answer which identifies each leakage and each injection but does not fully explain the key distinction between the two.
8. [1-4] L1: for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant.
9. [13] Candidates should be able to link interest rate changes to each of the three injections.
10. [13] A diagram might be used to demonstrate this understanding.
11. [13] Answers should focus on why injections might rise. For example, a decrease in interest rates might lead to a fall in exchange rates which in turn might lead to a rise in exports (injection).
12. [13] Good responses will attempt to critically evaluate this policy. For example, discussing why a fall in exchange rates might not affect exports in the short run. A similar approach can be adopted for each of the three injections.
13. [9-13] L4: for an answer that recognises that the impact of interest rate changes on injections will depend upon a number of related variables and that the potential changes will differ in the short run compared with the long run. Good responses will attempt to critically evaluate the impact. For example, a reduction in interest rates might have a limited effect on investment if in a recession investor confidence is low. There should be at least two examples of similar critiques.
14. [7-8] L3: for an answer that attempts to analyse the links between a fall in interest rates and changes in each injection. A positive impact should be identified. The analysis might be supported by a diagram and some comment might be made on the impact of these changes on income, output and employment.
15. [5-6] L2: for an answer that is limited to a descriptive explanation of the relation between interest rate changes and changes in each injection.
16. [1-4] L1: for an answer that has some basic correct facts but includes irrelevancies and errors of theory.