Which of the following statements about the circular-flow diagram is correct?
A)One must imagine that the economy operates without money in order to make sense of the diagram.
B)The diagram leaves out details that are not essential for understanding the economic transactions that occur between households and firms.
C)The government cannot be excluded as a decision maker in a circular-flow diagram.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

The circular-flow diagram is a simplified representation of the economy that includes the interactions between households and firms. While money is shown flowing between the two sectors, it is not necessary to imagine that the economy operates without money. The diagram is meant to be a simplified model, so it leaves out some details that are not essential for understanding the basic economic transactions between households and firms. Although the government can be included in the circular-flow diagram, it is not always necessary to include it to understand the basic interactions between households and firms.

Which of the Following Statements About the Circular-Flow Diagram Is