Macroeconomics

MONIAC — Hydraulic Economy Simulator

Built in 1949 by economist Bill Phillips, the MONIAC used water flowing through tanks and pipes to model the UK economy. This simulation lets you change government spending, investment, exports, the tax rate and the propensities to consume and import, and observe how income circulates through households, firms, the government and the rest of the world.

Diagram:Supply & Demand AD/AS PPF Monopoly Perfect Competition Labour Market Externalities Phillips Curve Trade & Tariffs Natural Monopoly Economy Dashboard MONIAC Domino Chains

The MONIAC, built in 1949 by the economist Bill Phillips, used water flowing between tanks to model how income circulates through an economy. This simulation follows the same idea: money flows out of national income through leakages and back in through injections, and national income rises or falls until leakages equal injections.

How to use this tool

Watch the National Income tank at the top. Money leaves it as tax, savings and imports and returns through government spending, investment and exports. The Live Readouts panel updates every tick as the economy settles.
In the Behavioural Parameters panel, change the “Marginal propensity to consume”, “Marginal propensity to import” and “Tax rate”. These set how much of each extra pound of income is spent at home and how much leaks out.
In the Injections panel, change “Government spending”, “Investment” and “Exports” and watch national income move to a new equilibrium.
Try the Scenarios, such as “2008 Recession”, “Fiscal Stimulus”, “Austerity” or “Saving Surge”, and use Pause and Reset to compare the readouts before and after.

What to notice

The circular flow links households and firms: income earned by households is spent on goods and services, which becomes income for firms and then for households again.
Withdrawals (savings, taxation and imports) take money out of the circular flow; injections (investment, government spending and exports) put money in. Aggregate demand in the model equals C + I + G + X − M.
National income is in equilibrium when total withdrawals equal total injections. If injections exceed withdrawals, income rises until the extra income generates enough extra leakage to restore the balance.
The multiplier readout shows that a change in an injection changes national income by more than the initial change, because each round of spending becomes someone else’s income.
The size of the multiplier depends on the leakages. A higher marginal propensity to consume raises it; a higher tax rate or marginal propensity to import reduces it.
In this model investment is set directly. It does not respond to interest rates, and savings do not automatically flow back as investment.

Using it in the exam

The MONIAC is a way to understand the circular flow and the multiplier rather than a diagram to draw, but the ideas carry straight into exam answers. When a question asks about a change in government spending, investment or exports, explain the initial injection and then the multiplier process: the extra spending becomes income, part of it is spent again and part leaks out through saving, taxation and imports, so each round is smaller. Use the formula k = 1 / (1 − MPC), or k = 1 / MPW where MPW = MPS + MPT + MPM in an economy with a government and trade, and show the final effect as a rightward shift of AD.

Evaluate: The multiplier is harder to use in practice than in the model. Its size is uncertain and changes over time, there are time lags before spending works through, and if the economy is close to full capacity a rise in injections may raise the price level rather than real output. Government spending financed by borrowing may crowd out private investment, and households may save extra income if confidence is low, which reduces the multiplier.

Revise the theory

Revise the theory behind this tool in our Edexcel revision notes:

Practise drawing the static versions you will need in the exam:

Frequently asked questions

What are injections and withdrawals in the circular flow?

Injections are additions to the circular flow of income that do not come from household spending: investment, government spending and exports. Withdrawals, also called leakages, are the parts of income not passed on as spending on domestic output: savings, taxation and imports. When injections are greater than withdrawals, national income rises; when withdrawals are greater, it falls.

What determines the size of the multiplier?

The multiplier depends on how much of each extra pound of income is spent on domestic output rather than leaking out of the circular flow. The higher the marginal propensity to consume, the larger the multiplier. The higher the marginal propensities to save, to pay tax and to import, the smaller it is. In an open economy with a government, k = 1 / MPW.

What was the MONIAC?

The MONIAC (Monetary National Income Analogue Computer) was a hydraulic model of the economy built by the economist Bill Phillips at the London School of Economics in 1949. Water represented money, tanks represented stocks such as savings and government revenue, and pipes and valves represented flows of spending and income. Several machines were built and used for teaching.

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