Author Question: The circular flow model indicates that income flows from households to firms through product markets ... (Read 122 times)

Wadzanai · **on:** Jun 30, 2018

The circular flow model indicates that income flows from households to firms through product markets and back from firms to households through factor markets. Is the total amount spent by all households equal to the total income that flows back to all households? Why or why not? Is the amount spent by each individual household equal to the amount that flows back to that specific household? Why or why not?

Question 2

Which of the following is the most unstable category of GDP?
a. consumption
b. investment
c. government purchases
d. net exports

ergserg · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

In our circular flow model, the total amount of spending for all households will be equal to the total amount of income. (The impact of issues such as taxes, exports, and imports could be added later.) However, the total amount spent by any one household is not necessarily equal to the amount of income which that specific household receives. Household income is determined by the value of the factors of production that the household owns rather than the amount of consumption by the household.

Answer to Question 2

b