The circular flow of income model shows that,if households and firms were the only two sectors in the economy,then:
A)income received by households is equal to the value of output produced by firms.
B)households directly lend a part of their savings to firms.
C)firms own the resources of production and rent it out to households.
D)resources used in production flow from households to firms.
E)payments for goods and services flow from firms to households.

Question

Quizplus · Accepted Answer

In the circular flow of income model, households provide factors of production such as labor and capital to firms, and in exchange, firms pay households for their services. This payment received by households is their income, which is equal to the value of output produced by firms. Thus, income received by households is equal to the value of output produced by firms. Option B is incorrect because households do not directly lend their savings to firms in this model. Option C is incorrect because in the circular flow model, households own the resources of production and provide them to firms for production. Option D and E are also incorrect because resources used in production flow from households to firms and payments for goods and services flow from firms to households.

The Circular Flow of Income Model Shows That,if Households and Firms