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Answers
Answer:
The circular flow diagram illustrates the interdependence of the “flows,” or activities, that occur in the economy, such as the production of goods and services (or the “output” of the economy) and the income generated from that production.
Explanation:
The circular flow model demonstrates how money moves through society. Money flows from producers to workers as wages and flows back to producers as payment for products. In short, an economy is an endless circular flow of money.
That is the basic form of the model, but actual money flows are more complicated. Economists have added in more factors to better depict complex modern economies. These factors are the components of a nation's gross domestic product (GDP) or national income. For that reason, the model is also referred to as the circular flow of income model.
KEY TAKEAWAYS
The circular flow model demonstrates how money moves from producers to households and back again in an endless loop.
In an economy, money moves from producers to workers as wages and then back from workers to producers as workers spend money on products and services.
The models can be made more complex to include additions to the money supply, like exports, and leakages from the money supply, like imports.
When all of these factors are totaled, the result is a nation's gross domestic product (GDP) or the national income.
Analyzing the circular flow model and its current impact on GDP can help governments and central banks adjust monetary and fiscal policy to improve an economy.