If some income earned by households is not spent on output, or if some income earned by firms is not spent on factor services, the circular flow of income will
A)contract.
B)expand.
C)run over.
D)stop.
E)explode.

Question

Quizplus · Accepted Answer

In the circular flow model, all income earned by households is meant to be spent on goods and services produced by firms, while all income earned by firms is meant to be spent on the factors of production (land, labor, capital) provided by households. If either of these flows is interrupted, for example if households decide to save rather than spend their income, or if firms hold onto their earnings instead of paying for factor services, then the circular flow contracts as less money is being exchanged in the economy.

If Some Income Earned by Households Is Not Spent on Output