Consider the circular flow of income model with households and firms as the two sectors.If business spending (investment) were suddenly decreased due to expectations of a dismal economy in the near future,then because total purchases would suddenly be reduced:
A)the income created would be reduced,and the value of output and the value of income would decline.
B)the income created would be reduced,and the value of output and the value of income would no longer be equal.
C)the income created would be reduced,and the value of output and the value of income would increase.
D)the income created would be reduced,and the value of output and the value of income would decline until the foreign sector was introduced.
E)the household sector would try to save more.

Question

Quizplus · Accepted Answer

Investment affects the production of goods and services and as a result, changes in investment will change the level of output and income in the circular flow model. A decrease in investment would lead to a decrease in total purchases, resulting in a decrease in the income created. This reduction in income would bring a decline in the value of output and income. Therefore, option A is the correct answer. The other options do not directly relate to the question.

Consider the Circular Flow of Income Model with Households and Firms