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In the circular flow diagram, what do the outer and inner circles respectively represent?
AExports and imports of the whole open economy
BSavings by households and investment by all firms
CReal flow of factors and goods, and monetary flow
DGovernment taxation and its transfer payments made
Answer & Solution
Correct answer: C. Real flow of factors and goods, and monetary flow
1. The circular flow model shows the connections between the different sectors of an economy.
2. In the two-sector diagram the outer circle represents the real flow, that is factors of production and goods.
3. The inner circle represents the monetary flow, that is factor prices and commodity prices.
4. The real flow runs as factor services from households to firms, and in turn as goods and services from firms to households.
5. The textbook notes that circular flow analysis is the basis of national accounts and macro economics.
_Source: TN HSC Class 12 Economics (Samacheer Kalvi, Govt of Tamil Nadu), Ch 1 "Introduction to Macro Economics", §1.9.1_
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