The Financial Markets
Up to this point, all of the income that has been earned by households, firms, government, and the rest of the world has been spent in the circular flow model. Private, public, and foreign sectors don't only spend money — they also save. To account for the fact that the different economic sectors save a portion of their income, the circular flow model enters the third dimension.
This third dimension is the financial markets. Households save for the future, government can run a budget surplus, businesses retain earnings for future investment, and the foreign sector engages in real and portfolio investment in the United States. Where do all of these savings go? Savings flow to financial intermediaries and from there to all sectors of the economy. When households save, they may buy shares of stock, bonds, or certificates of deposit. Government finances its spending in excess of taxes by issuing the various treasury securities.
The product market and the financial market.
No circular flow model is complete without a central bank that links government to the financial intermediaries. Careful attention to the diagram reveals that the central bank acts like a heart that pumps money into the economy's circulatory system. Clogged financial institutions, fearful households and firms, and unwilling government can stop an economy. The flow of the real economy in many ways is sensitive to the circular flow of spending and income.