The circular-flow diagram shows how:

Question

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The circular-flow diagram illustrates the flow of money, goods and services, and factors of production in the economy. This diagram shows how households supply labor and receive income, which is then used to purchase goods and services from firms. Firms use factors of production (such as labor and capital) to produce goods and services, which are then sold to households. Thus, the circular flow illustrates the interdependence of households and firms in the economy.

The Circular-Flow Diagram Shows How