Which of the following is illustrated by the circular flow of income?
A)the flows of expenditures and income in a household
B)that firms own the factors of production
C)the interaction of households and firms through the factors and goods markets
D)that the flow of payments moves in the same direction as the flow of goods
E)that there is no relationship between goods markets and factor markets

Question

Quizplus · Accepted Answer

The circular flow of income shows the interaction between households and firms through their exchange of factors of production and goods in the respective markets. This exchange leads to income for households and revenue for firms, which creates a circular flow of income and expenditures that drives the economy. Option A is too narrow to describe the full scope of the circular flow model. Option B is incorrect as firms do not necessarily own all factors of production. Option D is incorrect as the flow of payments can move in both directions depending on the type of transaction. Option E is incorrect as the circular flow model explicitly shows the relationship between the goods and factor markets.

Which of the Following Is Illustrated by the Circular Flow