Question

2. The circular-flow model The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of do inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Markets for Goods and Services Firms Households Markets for Factors of Production

Answer 1

The circular flow diagram shows the flow of income and goods and services within a closed economy from one sector to another. In the simple model depicted above, there is two sectors households and firms. The household supply labor to firms and firms supply goods and services. The labor is bought factor market while the goods and services are in the product market. In exchange, the firms pay the household wages and salaries while the household pays the dollar to buy goods and services.

Therefore, the correct options in the blanks should be

• firms
• labor

The workers sell their labor in factor market and receive wages from the firm. The household buys goods and services in the goods market and supply dollar. Therefore, the correct options are

• Manuel earns (Factor market)
• Poornima spends (Goods market)
• Mojito spends ( Goods market)

The household supply labor to firms in the factor market and the dollar in the goods market. Then the supply of dollar and labor flow from household to the firm. Therefore, the correct options are

• Poornima's labor
• The $325 Manuel spends