The circular flow model illustrates the equality of which of the following?

• A. Government spending and private saving
• B. Imports and exports
• C. Wages and profits
• D. Total income and total expenditure in the economy

Answer: (D)

Verified step by step guidance

1. Understand that the circular flow model in microeconomics represents the continuous movement of money, resources, and goods between different sectors of the economy, primarily households and firms.
2. Recognize that in this model, households provide factors of production (like labor) to firms, and in return, they receive income (wages, rent, profits).
3. Note that households use this income to purchase goods and services from firms, which represents total expenditure in the economy.
4. Identify that the circular flow model shows that the total income earned by households must equal the total expenditure on goods and services, because every payment made by buyers is income received by sellers.
5. Conclude that the equality illustrated by the circular flow model is between total income and total expenditure in the economy, reflecting the fundamental balance in economic activity.