1. Economic models The following diagram presents a circular-flow model of a sim
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Question
1. Economic models 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 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 Which of the following is true regarding this economic model? Because it does not take into account the role of government, the circular-flow diagram is useless for the purposes of modeling how dollars and resources move throughout an economy. Because, in reality, the economy is very large, the simplicity of the circular-flow diagram makes it useless for the purposes of modeling how dollars and resources move throughout an economy. 0 while simple, the circular-flow diagram can still be useful for the purposes of modeling how dollars and resources move throughout an economy. O Because it does not take into account international trade, the circular-flow diagram is useless for the purposes of modeling how dollars and resources move throughout an economy.Explanation / Answer
Answer:
While simple, the circular flow diagram can still be useful for the purpose of modeling how dollars and resources move throughout an economy.
The basic model illustrates the interaction between the household and business sectors through the product and resource markets. However, more realistic circular flow models include saving, investment, and investment borrowing enabled by the financial markets; taxes and expenditures of the government sector; and imports and exports of the foreign sector. .
The prime conclusion of the circular flow model is that the overall volume of the circular flow is largely unaffected by the path taken. In particular, household income can be used for consumption, saving, or taxes. The income diverting away from consumption and to saving or taxes does not disappear, but is used to finance investment by business sector and purchases by the government sector.
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