The circular flow diagram shows that

Question

Quizplus · Accepted Answer

The circular flow diagram depicts that the income generated by the economy flows from firms to households and households spend this income on purchasing final goods and services produced by firms. This implies that the total income generated in the economy equals the total purchases of final goods and services. Therefore, option A is correct. On the other hand, option B is incorrect because consumption expenditure is only a part of total expenditures and does not equal saving. Option C is incorrect because the payments for final goods and services must equal the payments to factors of production used in producing those goods and services, henceflows of payments are balanced. Finally, option D is incorrect because goods and factor markets are closely interlinked in the economy.

The Circular Flow Diagram Shows That