Figure 2-1

Question

Two sets of opposing squares, linked by two loops. The left and right squares indicate the actors, firms and households, respectively. The second set of opposing squares at the top and bottom, indicate the two markets: the market for goods and services and the market for factors of production, again respectively. For the loops, there is an inner loop flowing clockwise and an outer loop flowing counterclockwise. The top portion of the outer loop is labeled, A, and the bottom portion of that loop is, D. For the inner loop, the top portion is labeled, B, and the lower portion is labeled, C.

Refer to Figure 2-1. Which arrow represents the flow of goods and services?
a. D
b. B
c. A
d. C

Answer 1

In the context of a circular flow model:

• The inner loop typically represents the flow of goods and services from firms to households and the flow of consumer spending from households to firms.
• The outer loop typically represents the flow of factors of production from households to firms and the flow of payments from firms to households.

Given this, the arrow representing the flow of goods and services would be associated with the inner loop. Thus, the correct answer for the flow of goods and services is:

b. B