Which of the following statements about the circular flow diagram is false?

• A. Firms supply factors of production to households in exchange for wages.
• B. Firms sell goods and services to households in the product market.
• C. Money flows from households to firms when households purchase goods and services.
• D. Households supply factors of production to firms in exchange for income.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the circular flow diagram, which illustrates the movement of goods, services, factors of production, and money between households and firms in an economy.
2. Step 2: Identify the roles of households and firms: households supply factors of production (like labor, land, and capital) to firms, and firms use these factors to produce goods and services.
3. Step 3: Recognize that in the factor market, households provide factors of production to firms, and in return, firms pay households income (wages, rent, interest, profits).
4. Step 4: In the product market, firms sell goods and services to households, and households pay money to firms for these goods and services.
5. Step 5: Evaluate the given statements by comparing them to the correct flows in the circular flow diagram, noting that the false statement is the one claiming 'Firms supply factors of production to households in exchange for wages,' which reverses the actual direction of factor supply and payment.