Which of the following is NOT correct regarding circular flow of income?
Show answer & explanation
Correct answer: B
Explanation
The correct answer is option 2 i.e. Real Flow is more than money flow.
Statement 1:
Total production is equal to total consumption: This is generally true in a simplified two-sector model (households and firms) without government or foreign trade.
Statement 2:
Real Flow is more than Money Flow: Incorrect. In the circular flow model, real flow (goods and services) and money flow (payments for goods/services and factor incomes) are equal in value, though they represent different things. Neither is 'more' than the other.
Statement 3:
In a circular flow, the amount of leakages equals the amount of injections: This holds true in equilibrium conditions — leakages (savings, taxes, imports) = injections (investment, government spending, exports).
Statement 4:
The real flow and monetary flow move in a circular manner in an opposite direction: This is correct. Real flows go from firms to households (goods/services), and money flows go from households to firms (payments), and vice versa for factors of production.