The simple circular-flow model for households and firms is an economic model that focuses on the interaction between households and firms. Which of the following statements regarding the model is correct?
A) As the model does not include the interaction between firms and resource markets, it does not predict correctly.
B) As the model does not include the interaction between households and product markets, it does not predict correctly.
C) The model has too many simplifying assumptions, and it cannot be used to make predictions about the real world.
D) The model is a simplification of the real world, and it can be used to make predictions about the real world.
E) As the model does not include the interaction between firms and product markets, it does not predict correctly.

Question

Quizplus · Accepted Answer

The statement "The model is a simplification of the real world, and it can be used to make predictions about the real world" is correct. While it is true that the model does not capture all of the complexity of the real-world interactions between households and firms, it is a useful tool for understanding the basic flow of goods and services between these two groups. It can still be used to make predictions about how changes in variables such as production or consumption will affect the economy as a whole.

The Simple Circular-Flow Model for Households and Firms Is an Economic