Circular Flow Model Quiz

What do households provide to businesses in the circular flow model?

• Loans and investments

• Tax revenues

• Factors of production

• Public goods and services

Answer explanation

In the circular flow model, households provide factors of production, such as labor, land, and capital, to businesses. This is essential for production, making 'factors of production' the correct answer.

How do businesses compensate households for the factors of production?

• By offering loans

• By paying wages, rent, and interest

• By paying taxes

• By providing public goods

Answer explanation

Businesses compensate households for factors of production by paying wages for labor, rent for land, and interest for capital. This is how they reward households for providing these essential resources.

What role does the government play in the circular flow model?

• It only collects savings from households

• It lends money to businesses

• It collects taxes and provides public goods and services

• It provides factors of production to businesses

Answer explanation

In the circular flow model, the government plays a crucial role by collecting taxes from households and businesses, and in return, it provides public goods and services that benefit the economy.

What is the primary function of financial institutions in the circular flow model?

• To produce goods and services

• To facilitate the flow of capital between households and businesses

• To provide public goods and services

• To collect taxes from businesses

Answer explanation

The primary function of financial institutions in the circular flow model is to facilitate the flow of capital between households and businesses, enabling savings and investments to support economic activity.

Which of the following is NOT a component of the circular flow model?

• Government

• A non-profit organisation

• Businesses

• Households

Answer explanation

The circular flow model includes households, businesses, and government as key components. A non-profit organization is not a primary component of this model, making it the correct choice for what is NOT included.

How do businesses use the revenue from sales in the circular flow model?

• To collect taxes

• To provide welfare programs

• To save in financial institutions

• To pay for factors of production

Answer explanation

Businesses use revenue from sales primarily to pay for factors of production, such as labor, materials, and capital, which are essential for producing goods and services in the economy.

What do households do with a portion of their income in the circular flow model?

• They lend it directly to businesses

• They pay taxes to the government

• They save it in financial institutions

• They provide public goods

Answer explanation

In the circular flow model, households save a portion of their income in financial institutions, which allows for investment and lending to businesses, thus facilitating economic activity.

In the circular flow model, what do businesses produce using the factors of production?

• Goods and services

• Loans and investments

• Public goods and services

• Tax revenues

Answer explanation

In the circular flow model, businesses utilize the factors of production to create goods and services, which are essential for satisfying consumer needs and driving the economy.

What happens to the flow of money when households increase their savings in the circular flow model?

• It decreases the flow of money to businesses

• It increases the flow of money to the government

• It increases the flow of money to businesses

• It has no effect on the flow of money

Answer explanation

When households increase their savings, they spend less on goods and services, leading to a decrease in revenue for businesses. This results in a reduced flow of money to businesses in the circular flow model.

In the circular flow model, which sector is responsible for providing public goods and services?

• Government

• Financial institutions

• Businesses

• Households

Answer explanation

In the circular flow model, the government sector is responsible for providing public goods and services, such as infrastructure and education, which benefit society as a whole.