In a circular-flow diagram, which flows are involved?
A) Taxes flow from households to firms, and transfer payments flow from firms to households.
B) Income payments flow from firms to households, and sales revenue flows from households to firms.
C) Resources flow from firms to households, and goods and services flow from households to firms.
D) Inputs and outputs flow in the same direction as the flow of dollars, from firms to households.

Question

Quizplus · Accepted Answer

In a circular-flow diagram, the flows typically involved are income payments flowing from firms to households and sales revenue flowing from households to firms. This represents the exchange of goods and services for money between the two parties. Option A is incorrect because taxes are typically paid by households to the government, not to firms. Transfer payments are also typically from the government to households, not from firms to households. Option C is also incorrect because resources (e.g. labor and capital) flow from households to firms, not the other way around. Goods and services flow from firms to households in exchange for money. Option D is incorrect because inputs and outputs are not typically shown in a circular-flow diagram.

In a Circular-Flow Diagram, Which Flows Are Involved