Which of the following statements regarding the circular-flow diagram is true?

• A. The circular-flow diagram shows only the flow of money, not goods and services.
• B. Households provide factors of production to firms in exchange for income.
• C. Households sell goods and services to firms in the factor market.
• D. Firms purchase goods and services from households in the product market.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the circular-flow diagram, which illustrates the flow of goods and services and money between two main sectors: households and firms.
2. Step 2: Recognize that households provide factors of production (such as labor, land, and capital) to firms through the factor market, and in return, they receive income (wages, rent, interest, and profits).
3. Step 3: Note that firms use these factors of production to produce goods and services, which they sell to households in the product market.
4. Step 4: Identify that money flows from firms to households as income for factors of production, and money flows from households to firms as payment for goods and services.
5. Step 5: Conclude that the correct statement is the one describing households providing factors of production to firms in exchange for income, as this accurately reflects the flows in the circular-flow diagram.