Question

1. The economy's income and expenditure The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the nner 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 Based on this model, households earn income when ms purchase a or and ca tal ▼ n markets for actors of roduction 50 per week working as a o households Suppose Becky earns $6 Diner. Dinah's Diner pays Alex $225 per week to wo Associates ey for Rowan and Martin Associates. She uses $10 to have breakfast at Dinah's firms rder cook, Alex uses $250 to purchase legal service from Rowan and Martin

Answer 1

(a) Households earn income when firms purchase labor and capital in market for factor of production.

(b)

(i) Alex spends $250 to purchase legal service - Market for goods and services

(ii) Becky spends $10 - Market for goods and services

(iii) Becky earns $650 per week - Market for factors of production

(c) Following represents flow from firm to household:

- The breakfast Becky receives (Outflow of service (an output) from firm)

(d) True

As per circular flow model, total income equals total expenditure.