Which of the following is correct according to the circular flow model of an economy?

• A. Firms purchase income from households in the factor market.
• B. Households provide factors of production to firms and receive income in return.
• C. Firms supply factors of production to households and receive goods in return.
• D. Households sell finished goods to firms in the product market.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the circular flow model of an economy, which illustrates the movement of resources, goods, services, and money between households and firms through two main markets: the factor market and the product market.
2. Step 2: Identify the role of households in the factor market: households provide factors of production (such as labor, land, and capital) to firms. In return, they receive income (wages, rent, interest, and profits).
3. Step 3: Identify the role of firms in the factor market: firms purchase or hire factors of production from households and pay them income.
4. Step 4: Recognize the role of the product market: firms supply finished goods and services to households, who then purchase these goods and services using their income.
5. Step 5: Evaluate each statement based on these roles: the correct statement is that households provide factors of production to firms and receive income in return, which aligns with the circular flow model.