The circular flow diagram shows that
A)the value of total income is equal to the total value of expenditures on final goods and services.
B)firms pay households wages,and households receive transfer payments from firms.
C)households spend all their income on goods and services.
D)GDP will be less than the total value of expenditures on final goods and services in the economy.

Question

Quizplus · Accepted Answer

The circular flow diagram illustrates how households and businesses interact in the economy. In this diagram, money flows in two directions: from households to businesses in exchange for goods and services, and from businesses to households in exchange for the factors of production (labor, capital, etc). Ultimately, the total value of expenditures on final goods and services must be equal to the total income earned by households, since every dollar spent on a good or service is a dollar of income for someone else. This is represented by the flow of income and expenditure around the circular flow diagram. Therefore, the best choice is A.

The Circular Flow Diagram Shows That