Read the following statements - Assertion (A) and Reason (R):
Assertion (A) In Circular Flow of Income in a simple economy, amount that the firms had distributed in the form of factor payments equals aggregate consumption expenditure that they receive as sales revenue.
Reason(R) Circular Flow of Income in a simple economy, function without a government, external trade or any savings.
Which of the following is the correct option in regard to the above statements?
Assertion (A) In Circular Flow of Income in a simple economy, amount that the firms had distributed in the form of factor payments equals aggregate consumption expenditure that they receive as sales revenue.
Reason(R) Circular Flow of Income in a simple economy, function without a government, external trade or any savings.
Which of the following is the correct option in regard to the above statements?
Answer & explanation
Correct answer: option 1
In a circular flow of 2 sector model it is assumed that only 2 entities are there i.e. firms and households. Economy works without intervention of govt. and no international trade.
Also there is no leakage in the system i.e. the difference between the amount that the firms had distributed in the form of factor payments and the aggregate consumption expenditure that they receive as sales revenue is zero.
Also there is no leakage in the system i.e. the difference between the amount that the firms had distributed in the form of factor payments and the aggregate consumption expenditure that they receive as sales revenue is zero.