Explain how the circular flow diagram illustrates that the total value of spending on goods and services in an economy is equal to the total value of income in that economy
What will be an ideal response?
Firms sell goods and services to households, the government, and the rest of the world, and to produce these goods and services, firms buy factors of production from households. Households receive payment for the factors of production sold to firms. The sum of the payments received by households is total income, which is a measure of GDP. The total value of spending on the goods and services sold by firms is also a measure of GDP, so the total value of spending on goods and services in an economy is equal to the total value of income in the economy because each is a way to measure GDP.
You might also like to view...
What is the relationship between real interest rates and investment, other things being equal?
a. No apparent relationship b. A quadratic relationship c. A positive relationship d. A negative relationship
Which of the following financial institutions does NOT have to meet minimum reserve ratios?
i. the Fed ii. commercial banks iii. credit unions A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii