Based on the circular flow diagram, households earn income when:

• A. they provide factors of production to firms
• B. they save money in financial markets
• C. they purchase goods and services from firms
• D. they pay taxes to the government

Answer: (A)

Verified step by step guidance

1. Understand the circular flow diagram, which illustrates the movement of resources, goods, services, and money between different sectors of the economy, primarily households and firms.
2. Identify the role of households in the economy: households own and provide factors of production such as labor, land, and capital.
3. Recognize that firms pay households income in exchange for these factors of production, which is how households earn income.
4. Note that saving money in financial markets, purchasing goods and services, or paying taxes are activities households do with their income, not how they earn it.
5. Conclude that the correct way households earn income in the circular flow model is by providing factors of production to firms.