Question

Answer 1

Advantages- The modern economy is a monetary economy. In the modern economy, money is used in the process of exchange. Money has facilitated the process of exchange and has removed the difficulties of the barter system. The households supply the economic resources or factors to the productive firms and in return they get payments in form of money.

Justification and Explanation- Assuming that all income received by households is spent and nothing is saved, or investment. Money flows of income and expenditure corresponding to the real flows in terms of goods, services and productive factors. Labour and entrepreneural capability flow from households to business firms as indicated in the diagram given in question. In the opposite direction, money flows from business firms to households as factor payments in forms of wages, rent. Using this money the households consume goods and services and pay to firms for their products and services. this cycle continues.

Disadvantage- According to this cycle of money flow, the money income is not stable and will fall when the economy is in depression and will rise when the economy is in a boom period. This is because flow of money is a measure of national income so when economy is in depression, the income is low and thus money flow is low.

Recommendation- To move away from this uncertainity and unstability of money flow, there should be infusion of Government to regulate the markets and also the infusion of banking system to make borrowers and lenders meet. In this way households will start saving their money, banks will lend this saved money, business will borrow this money to invest and then pay interest to lenders in return. This way economy can grow at a stable pace.