Which situation best illustrates the role of households in the circular flow of goods?

• A. Banks provide loans to entrepreneurs.
• B. Households purchase groceries from a local supermarket.
• C. The government collects taxes from businesses.
• D. Firms invest in new machinery to increase production.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the circular flow model, which illustrates how money, goods, and services move between households and firms in an economy.
2. Step 2: Identify the role of households in this model. Households primarily act as consumers who purchase goods and services, and as providers of factors of production (like labor) to firms.
3. Step 3: Analyze each option to see which one involves households directly purchasing goods or services, reflecting their role as consumers.
4. Step 4: Recognize that 'Households purchase groceries from a local supermarket' directly shows households buying goods, which is a key part of the circular flow of goods.
5. Step 5: Conclude that this option best illustrates the role of households in the circular flow of goods, as it involves the exchange of money for goods between households and firms.