What does the simple circular-flow diagram illustrate?
A) that expenditure generates income so that income and the value of production are equal
B) that the economy's income exceeds its expenditure
C) that factors of production "flow" from firms to households
D) that money "flows" from households to firms

Question

Quizplus · Accepted Answer

The simple circular-flow diagram illustrates how expenditure from buyers generates income for sellers, which then allows those sellers to purchase goods and services themselves, creating a circular flow of income and goods/services in the economy. This is illustrated by the arrows going from households to firms (representing expenditure) and from firms to households (representing income). The diagram also shows that the value of production equals the value of income generated since every dollar spent by a buyer becomes someone else's income.

What Does the Simple Circular-Flow Diagram Illustrate