In the circular flow model, which statement is true?

In the circular flow model, which statement is true?

• A. Firms supply goods and services to households.
• B. Firms supply goods and services to households; households supply factors of production to firms.
• C. The government sets prices for all goods.
• D. Households supply goods and services to firms.

Answer: (B)

In the circular flow model, goods and services move from firms to households, while resources (labor, capital, land) move from households to firms. This creates two overlapping flows: firms supply goods and services to households, and households supply factors of production to firms, with money moving in the opposite directions as wages and payments circulate. The statement that best captures this is that firms supply goods and services to households; households supply factors of production to firms. The other options misstate the direction of flows or add elements (like the government setting prices for all goods) that aren’t part of the simplest circular flow.

In the circular flow model, goods and services move from firms to households, while resources (labor, capital, land) move from households to firms. This creates two overlapping flows: firms supply goods and services to households, and households supply factors of production to firms, with money moving in the opposite directions as wages and payments circulate. The statement that best captures this is that firms supply goods and services to households; households supply factors of production to firms. The other options misstate the direction of flows or add elements (like the government setting prices for all goods) that aren’t part of the simplest circular flow.