Question

Which of the following statements is true in the simple circular flow model? a There is...

Which of the following statements is true in the simple circular flow model?

a

There is no government and no foreign sector (closed economy).

b

Households make factor payments to firms for the resources they supply, which are used to produce goods and services.

c

Factor prices are determined by the interaction of supply and demand of resources.

d

All of the above.

e

Only a) and c)
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Answer #1

First, let us define what is the simple circular flow model. It is defined as the flow of money through the economy. The flow of income between the household sector and the business sector.

It has 4 factors of payments:

1. Wages for the Labour

2. Rent for the Land

3. Interest for the capital

4. Profit for Entrepreneurs.

So the answer to the above question is E. As in the circular flow model we have no government interference and factor prices are determined by the interaction of demand and supply. The household doesn't pay the factor payments. They pay for the products and services they buy. The sellers pay for the factor payments.

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