Discussion
In a two-sector model, circular flow of income takes place between:
Answer: C
In a two sector model of the circular flow there are only households and firms. Households supply factors of production to firms and receive income, and then spend that income on the goods and services produced by firms, so income and output flow in a circle between the two. The government and the foreign sector are added in the three and four sector models. The answer is firms and households, option C. The two flows are the real flow of factor services and goods and the money flow of income and expenditure moving the other way.
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