Two Models of the Economy

We can think of the economy in 2 ways:

1) AD/AS model - The economy is like our demand and supply model used in microeconomics, except that we add all the demand in the economy to get Aggregate Demand, and all the supply in the economy is Aggregate Supply

2) Income-Flow Model - also called Circular Flow Model - the economy is like a tire that expands and contracts.  Leakages from the circular flow make the economy contract.  These leakages are Taxes (T), Savings (S), and Imports (M).  Injections into the circular flow make the economy expand.  These injections are Government Spending (G), Real Investment Spending (I), and Exports (X).