Circular Flow Of Income

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DEFINITION of 'Circular Flow Of Income'

The circular flow of income is a neoclassical economic model depicting how money flows through the economy. In the most simple version, the economy is modeled as consisting only of households and firms. Money flows to workers in the form of wages, and money flows back to firms in exchange for products. This simplistic model suggests the old economic adage, "Supply creates its own demand."

BREAKING DOWN 'Circular Flow Of Income'

The circular flow of income model illustrates the interdependencies of different factors in the economy. However, actual money flows through the economy are far more complicated. Economists have expanded on the ideas of the circular flow of income model to better depict the complexity of modern economies.

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RELATED FAQS
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    The circular flow of income is an economic device used to describe the perpetual nature of savings, investments and spending. ... Read Full Answer >>
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    The Federal Reserve can increase aggregate demand in indirect ways by lowering interest rates. Aggregate demand is a measure ... Read Full Answer >>
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