Question

Governments often talk about the importance of consumer confidence in the economy. How does the circular flow of income illustrate the reliance Businesses have on consumer confidence?

Answer 1

The circular flow of income is an indication of the reliance of businesses on consumer confidence because;

• The more money consumers have, the more is their purchasing power.

Consumer confidence

Consumer confidence put simply, is an economic indicator that measures the degree of optimism that consumers feel about the overall state of the economy and their individual financial situation. On this note, when consumer confidence is high, consumers make more purchases and when confidence is low, consumers tend to save more and spend less.

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