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Questions and Answers
In a two-sector economy, which loop of the circular flow of income represents the flow of factor services from households to firms?
In a two-sector economy, which loop of the circular flow of income represents the flow of factor services from households to firms?
- Outer loop (correct)
- Tertiary loop
- Inner loop
- Secondary loop
What flows from firms to households in the circular flow of income in a two-sector economy?
What flows from firms to households in the circular flow of income in a two-sector economy?
- Investment
- Factor services
- Factor payments
- Goods and services (correct)
How is the entire amount of money paid by firms as factor payments returned to the firms in a two-sector economy?
How is the entire amount of money paid by firms as factor payments returned to the firms in a two-sector economy?
- As government spending
- As consumption expenditure by households (correct)
- As exports to foreign countries
- As investment by households
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Study Notes
Circular Flow of Income in a Two-Sector Economy
- The loop that represents the flow of factor services from households to firms is the resource market loop.
- In the circular flow of income, firms pay households for factor services in the form of rent, wages, and interest.
- The flow from firms to households in the circular flow of income is the payment of rent, wages, and interest.
- The entire amount of money paid by firms as factor payments is returned to the firms when households spend their entire income on goods and services produced by the firms.
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