In the circular flow model, the market economy creates which of the following?

• A. Continuous flows of goods, services, and money between households and firms
• B. Elimination of all interactions between households and firms
• C. Government control over all economic transactions
• D. A one-way transfer of resources from firms to households

Answer: (A)

Verified step by step guidance

1. Understand the circular flow model as a fundamental concept in microeconomics that illustrates how money, goods, services, and resources move continuously between different sectors of the economy, primarily households and firms.
2. Identify the two main markets in the model: the product market (where goods and services are bought and sold) and the factor market (where resources like labor and capital are exchanged).
3. Recognize that households provide factors of production (like labor) to firms through the factor market, and in return, receive income (wages, rent, profits).
4. Note that households use this income to purchase goods and services from firms in the product market, creating a continuous flow of money and resources between the two.
5. Conclude that the circular flow model represents continuous, two-way interactions between households and firms, rather than elimination of interactions, government control, or one-way transfers.