A circular flow diagram of an economy shows that
A) individuals tend to be highly specialized.
B) households earn wages and salaries for their labour supplied to the firms.
C) households buy goods and services from firms.
D) firms use the labour they hire to produce goods and services.
E) All of these.

Question

Quizplus · Accepted Answer

A circular flow diagram of an economy shows the interdependence of households and firms. It illustrates that firms use the factors of production (including labor hired from households) to produce goods and services, which are then sold to households. In turn, households spend money on these goods and services, generating revenue for the firms. Thus, the diagram depicts the flow of money, goods, and services between households and firms, demonstrating the mutual benefits of their interactions. Therefore, all of the choices are correct.

A Circular Flow Diagram of an Economy Shows That