Reduced consumption, in turn, reduces the sales and incomes of the firms. It tends to reduce consumption and saving of the household sector. As already noted, taxation is a leakage from the circular flow.
Now we take the household, business and government sectors together to show their inflows and outflows in the circular flow. These government expenditures are injections into the circular flow of money. On the other hand, the government purchases all its requirements of goods of all types from the business sector, gives subsidies and makes transfer payments to firms in order to encourage their production. All types of taxes paid by the business sector to the government are leakages from the circular flow. Next take the circular flow between the business sector and the government sector. All such expenditures by the government are injections into the circular flow of money. But the government purchases the services of the households, makes transfer payments in the form of old age pensions, unemployment relief, sickness benefit, etc., and also spends on them to provide certain social services like education, health, housing, water, parks and other facilities.
Taxes in the form of personal income tax and commodity taxes paid by the household sector are outflows or leakages from the circular flow. First, take the circular flow between the household sector and the government sector.
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