The basis of the circular-flow diagram is that the money flowing into each sector or market is equal to the money that flows out.

Question

Quizplus · Accepted Answer

This is the fundamental assumption of the circular-flow diagram. The money that households receive from selling their labor and other resources flows into the product market in exchange for goods and services produced by firms. Similarly, the revenue that firms receive from selling their products flows back to households in the form of wages, salaries, dividends, and other payments for the use of resources. This creates a continuous flow of money that supports economic activity.

The Basis of the Circular-Flow Diagram Is That the Money