Question

Name the type of economy depicted of the domestic circular flow of income and spending

Answer 1

The circular flow of income is a neoclassical economic model depicting how money flows through the economy. In its simplest version, the economy is modeled as consisting only of households and firms. Money flows to workers in the form of wages, and money flows back to firms in exchange for products. In short, an economy is made up of countless circular flows of income or money

Answer 2

The circular flow of income and spending influence the economy of households and firms. It shows how the money is spent and it flows through the different sectors of the economy. It is a part of the neoclassical economic model. The circular flow of income helps in calculating the national income and GDP of the country.

Explanation:

• The money is spent by the firms to pay the wages of the employees. The people use their income for buying goods and services in the economy.  

• Hence the money flows back into the economy in the form of exchanging it for buying the products.  

• In the households, some part of the income is spent on buying commodities and some part is also kept as savings.

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