Money circulates in a closed loop: households supply labour to firms and
receive wages, firms sell goods back to households, government injects
spending and withdraws taxes, and banks recycle savings into loans at the
policy interest rate. Token speed along each arrow is proportional to that
leg's money flow; the strip chart on the right plots GDP over time as you
move the sliders.
GDP ≈ 100 · (1 + 0.6·gov_spend − 0.4·tax − 0.05·rate)
inflation ≈ 2% + 15·gov_spend − 0.8·rate
unemployment ≈ max(1%, 5% − 8·gov_spend + 0.6·rate)
- Government spending — fiscal injection into the circular flow; more spending speeds the government→firms leg and raises GDP and inflation.
- Tax rate — withdrawal from household income; higher taxes slow the households→firms leg.
- Interest rate — the price of borrowing set by banks; higher rates slow the banks→firms investment leg, cooling GDP and inflation.