In the simple economy, households decide to spend more on goods and services. Arrange the following in the order in which they happen:
(A) Firms pay extra remunerations to the factors of production.
(B) Households spend more on the goods and services produced by firms.
(C) Households' income rises by the amount needed for the extra spending.
(D) Firms produce more goods and services to meet the extra demand.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (B), (D), (A), (C)
Extra spending sets off a chain that brings the money back to households.
(B) Households spend more — the starting point.
(D) Firms produce more — to meet the extra demand.
(A) Firms pay extra remunerations — because they produce more.
(C) Households’ income rises — the extra payments become their earnings.
NCERT (2026-27): “2.2 Circular Flow of Income and Methods of Calculating National Income … Now if they spend more on the goods and services, the firms will produce more goods and services to meet this extra demand. Since they will produce more, the firms must also pay the factors of production extra remunerations. How much extra amount of money will the firms pay? The additional factor payments must be equal to the value of the additional goods and services that are being produced. Thus the households will eventually get the extra earnings required to support the initial additional spending that they had undertaken. In other words, the households can decide to spend more – spend beyond their means. And in the end their income will rise exactly by the amount which is necessary to carry out the extra spending. …” |