Easy learning notes for student

Class-XII
Subject: Economics
Unit 1: National Income and Related Aggerates, Chapter 1: Circular flow Income

1. Assertion (A): Circular flow of income refers to the unending flow of income and
expenditure in an economy.
Reason (R): In a two-sector economy, income received by households is spent on
consumption, which becomes income for firms. (CBSE 2023 - Assertion-Reason,
Understanding Level)
Options:
A. Both A and R are true and R is the correct explanation of A
B. Both A and R are true but R is not the correct explanation of A
C. A is true but R is false
D. A is false but R is true
Answer: A
2. Which of the following statements is/are correct about the circular flow of income in
a two-sector model? (CBSE 2020 - Statement-Based, Applying Level)
(i) Households supply factor services and receive income.
(ii) Firms sell goods to the government.
(iii) Households use all income for savings only.
(iv) Firms use factors of production to produce goods.
Options:
A. Only (i) and (iv)
B. Only (ii) and (iii)
C. Only (i), (ii), and (iv)
D. All of the above
Answer: A
3. In a two-sector economy, the households are the owners of __________. (CBSE 2019 -
Basic Recall, Remembering Level)
A. Capital goods
B. Factors of production
C. Firms
D. Finished goods
Answer: B
4. Case Study:
Read the passage and answer the question:
"In a closed economy with no government or external trade, the income generated by firms
through production is entirely used by households for consumption and savings. Firms, in
turn, use these savings for investment."
Which flow is missing in this description? (CBSE 2021 - Case-Based, Understanding
Level)
A. Real Flow
B. External Flow
C. Government Flow
D. Import Flow
Answer: A
5. Which of the following best explains the difference between real flow and money flow in a
two-sector economy? (CBSE 2023 - Analytical, Analyzing Level)




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, A. Real flow refers to production; money flow refers to taxation.
B. Real flow consists of goods and services; money flow involves payments and
receipts.
C. Real flow occurs only in a government economy.
D. Money flow means export and import services.
Answer: B
6. Which among the following represents a leakage in the circular flow of income? (CBSE
2022 - Application-Based, Applying Level)
A. Government expenditure
B. Consumption
C. Investment
D. Savings
Answer: D
7. Assertion (A): Real flow refers to the flow of goods and services.
Reason (R): Firms pay wages to households, which is part of real flow. (CBSE 2021 -
Assertion-Reason, Evaluating Level)
Options:
A. Both A and R are true and R is the correct explanation of A
B. Both A and R are true but R is not the correct explanation of A
C. A is true but R is false
D. A is false but R is true
Answer: C
8. Identify the correct statement(s) about circular flow: (CBSE 2018 - Statement-Based,
Understanding Level)
(i) Factor income flows from households to firms.
(ii) Consumption goods flow from firms to households.
(iii) Firms earn profits from households.
(iv) Factor services flow from households to firms.
Options:
A. Only (ii) and (iv)
B. Only (i), (iii), and (iv)
C. Only (ii), (iii), and (iv)
D. All of the above
Answer: A
9. Case:
"In a hypothetical economy, households supply land, labour, and capital to firms, and in
return, receive rent, wages, and interest. Firms produce goods and sell them to
households." (CBSE 2017 - Case-Based, Analyzing Level)
What kind of economy is described here?
A. Open economy with government
B. Two-sector economy
C. Three-sector economy
D. Four-sector economy
Answer: B
10. If investment increases in an economy but savings remain constant, what will be the
impact on circular flow of income? (CBSE 2020 - Creating Level)

A. It will shrink




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