Why must total spending be equal to total income in an economy?

• A. Because total spending is always greater than total income due to savings.
• B. Because the government sets spending and income to be equal through fiscal policy.
• C. Because every dollar spent by buyers becomes income for sellers, ensuring that aggregate spending equals aggregate income.
• D. Because only businesses receive income, while households do not spend.

Answer: (C)

Verified step by step guidance

1. Understand the circular flow of income in an economy, where households and firms interact through markets for goods and services and factor markets.
2. Recognize that when buyers (households, firms, government, and foreigners) spend money on goods and services, this spending becomes revenue for sellers (firms).
3. Note that the revenue firms receive from selling goods and services is then paid out as income to factors of production (labor, capital, land) owned by households.
4. Realize that this process means every dollar spent by buyers translates into income earned by someone else in the economy, creating a direct link between total spending and total income.
5. Conclude that because of this continuous flow, aggregate total spending must equal aggregate total income in the economy, ensuring the equality holds in national accounts.