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In the basic (two-factor) circularflow model,money flows from households to businesses as consumer expenditures in exchange for goods and services produced by the businesses,then flows back from businesses to households for the labor that individuals provide.

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  • What is the circular flow of income?

  • The flows of money between the sectors are also tracked to measure a country鈥檚 national income or GDP , so the model is also known as the circular flow of income. The circular flow model, also known as the circular flow of income, describes how money and economic resources flow in cycles between different sectors in an economic system.

  • How do saving and investment affect the circular flow of money?

  • Thus savings which flow into the capital market are taken away by the business sector for investment and the circular flow of money is maintained in the economy. Figure 63.2 shows how the circular flow of money is altered by the inclusion of saving and investment.

  • What is the circular flow model?

  • The circular flow model demonstrates how money moves from producers to households and back again in an endless loop. The models can be made more complex to include additions to the money supply, like exports, and leakages from the money supply, like imports.

  • What is the circular money movement?

  • When households pay for the Nutella jars, the money will reach the factory owners, completing the money鈥檚 circular flow. It is important to note that the economy runs on several thriving circular money movements. The above example is simplistic.