The circular flow model illustrates the crucially important idea of macroeconomics, which is that:
A) every expenditure of someone in the economy is exactly equal to the income of another.
B) only two markets exist in every economy-input and output.
C) income is lower when there is more spending on goods and services.
D) the flow of two things in the economy-"stuff" and "money"-travel in the same direction.

Question

Quizplus · Accepted Answer

The circular flow model shows that every expenditure in the economy is equal to someone else's income. This idea is crucial to macroeconomics because it demonstrates the interdependence of actors in the economy and the importance of considering both spending and income in analyzing economic activity. Option B is incorrect because there are many markets in every economy, including labor and financial markets. Option C is incorrect because there is no necessary relationship between spending and income- in some cases, an increase in spending may lead to an increase in income, for example if businesses hire more workers to meet demand. Option D is incorrect because while the flow of money and goods may be interconnected, they do not always travel in the same direction- for example, households may save money rather than immediately spending it on goods and services.

The Circular Flow Model Illustrates the Crucially Important Idea of Macroeconomics