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Chapter 02 Homework-The circular-flow model

Chapter 02 Homework- EC110-Principles of Macroeconomics

Question:

Which of the elements of this scenario represent a flow from a household to a firm? This could be a flow of dollars, inputs, or outputs. Check all that apply.

a. The car wash Rosa receives,

b. Rosa’s labor,

c. The $100 Nick spends to purchase medical services from the Medical Clinic,

d. The $375 per week Nick earns working for Spotless Car Wash.

Circular flow of income:

The circular flow of income runs with two aspects that are; real flow and monetary flow. It works in the mutual functioning of incomes as well as the expenditure approach. Real flow implies the circulation of goods and services (from household to firm) and is implied by monetary flow, which is the circulation of money in response to the real flow.

Chapter 02 Homework-The circular-flow model

Answer and Explanation:

b. Rosa’s labor and c. The $100 Nick spends to purchase medical services from the Medical Clinic

Rosa provided her labor services to the firm, which would be the flow of inputs. Whereas the spending made by Nick for purchasing medical services is the money paid to the firm in exchange for the services given by the medical clinic. So, It would be considered a monetary flow of transactions. Options a and d, do not represent the circulation of money from a household to a firm. Therefore, the correct options are b and d.

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