TutorOn by Sanath Withanage

Question:

For an economy consisting of households and business firms only, which of the following is consistent with the circular flow of income?
(1) Households are producers of goods and services and business firms are consumers of productive resources.
(2) Households are users of productive resources and business firms are sources of savings.
(3) Households are suppliers of productive resources and business firms are producers of goods and services.
(4) Business firms are collectors of taxes and households are sources of taxes.
(5) Business firms are suppliers of productive resources and households are consumers of goods and services.

Correct Answer:

(3)

Answer Explanation:

In a simple two-sector circular flow model, Households own all the factors of production (land, labor, capital) and supply them to Firms. In return, Firms use these productive resources to manufacture goods and services, which they then sell back to the Households.

Topic: Macroeconomics Year: 2018