Question

Use the drop-down menus to complete the statements. In the circular flow model, households provideto firms. This is represented by the letter A. In return, within the circular flow model, firms provide households with. This is represented by the letter B. Firms then provideto households. This is represented by the letter C. Finally, households provide theirto firms. This is represented by the letter D.

Answer 1

The key to understanding the circular income model is to realize that families are the ones who provide labor for the firms and at the same time buy the firm's products. The model uses a simplifying hypothesis that there are only two sectors (families and firms) and that families do not save, that is, they use all their income in consumption.

The cycle works this way:

Firms and families go to the goods and services market, where firms supply goods and services and families consume these goods and services. Thus, income goes from households to firms (A) and firms provide goods and services to households (B).

In a second moment, the income that is with the firms is used with the factors of production (capital and labor) in the factors market. Work is provided by families, so income is passed on to families through wages (C). Finally, the families that work in the factor market produce the goods that belong to the firms (D). Then the cycle restarts!

I put a graphic for you!

Answer 2

1. Factors of production 

2. Goods and services 

3. Income 

4. Expenditures