Answer to Question #314693 in Macroeconomics for Isay

Question

Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities. a. Selena pays a storekeeper $1 for a quart of milk. b. Stuart earns $8 per hour working at a fast-food restaurant. c. Shanna spends $40 to get a haircut. d. Salma earns $20,000 from her 10 percent ownership of Acme Industrial. 

Answer 1

The following circular flow diagram represents the flow of income from firms to households and from households to the firm. The firm produces goods and services and supplies them to households. The households provide their labor and other factor services in the production process for which they get paid by the firm. Thus, the goods, services, and payments flow between the two.

(a) There is a flow of goods from the firms to households as Selena buys the good (milk) produced by the firm and, in return, pays them $1, so the flow of dollars is from household to firm.

(b) Stuart provides his services to the restaurant, so in the factor market, there is a flow from household to firm as Stuart provides his services. Also, Stuart gets $8 per hour as factor payments, and thus, the dollar flows from firm to household.

(c) The movement of dollar ($40) is from household to firm as Shanna has paid $40, whereas the flow of services in the form of haircut is from the firm to household.

(d) Here, only the dollar flows as Salma earns $20,000 on her investment. The flow is from firm to household.