Identify the assumptions of the two - sector economy's circular flow of income.

(A) There is no trade with other countries.
(B) Households do not spend all their income.
(C) There is no government.
(D) Households do not save.

Choose the correct answer from the options given below:

(A), (C) and (D) only

The correct answer is Option (1) → (A), (C) and (D) only

A two-sector economy consists of only households and firms, excluding the government and foreign sectors. The main assumptions of this simple circular flow model are:

• (A) There is no trade with other countries — it is a closed economy (no imports or exports).

• (C) There is no government — hence, no taxes or government expenditure.

• (D) Households do not save — they spend their entire income on consumption, so there are no leakages from the flow of income.

(B) Households do not spend all their income. Incorrect. The model assumes the opposite: Households spend their entire income on consumption (i.e., there are no savings).