Using the circular-flow model, explain what happens to household income in the recessionary interval when the production of output declines.

Question

Quizplus · Accepted Answer

The Answer is The loops in the circular-flow model provide a framework to address the sequence of events that begin with economic shutdown and continue with recession. The shutdown interval first sends workers home to shelter-in-place, which reduces the factors of production flowing from households to businesses. This intervention decreases the production of output by businesses. At the same time, when the production of output declines and sales decrease, the level of revenue flowing to businesses decreases. This effect leads to a decrease in both household income and spending.

Using the Circular-Flow Model, Explain What Happens to Household Income