In the context of the circular flow diagram for a simple economy, which of the following best describes the most direct supply chain?

• A. Government collects taxes from households and firms and redistributes income.
• B. Firms supply factors of production to households, and households provide goods and services to firms.
• C. Households provide factors of production to firms, and firms supply goods and services to households.
• D. Banks lend money to households, who then invest in firms.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the circular flow diagram, which illustrates the movement of resources, goods, services, and money between different sectors of a simple economy, primarily households and firms.
2. Step 2: Identify the roles of households and firms: households own and supply factors of production (like labor, land, and capital), while firms use these factors to produce goods and services.
3. Step 3: Recognize that the most direct supply chain in this model involves households providing factors of production to firms, which in turn supply goods and services back to households.
4. Step 4: Note that government taxation and redistribution, as well as banking activities, are important but represent additional flows rather than the core supply chain between households and firms.
5. Step 5: Conclude that the best description of the direct supply chain is: households provide factors of production to firms, and firms supply goods and services to households.