Q.In a two sector economy, the flow of factor payments moves from __________ to __________. (Choose the correct option to fill in the blanks) (A) firms, households (B) firms, government (C) banks, households (D) households, firms

In a two-sector economy, the model consists only of households and firms. Households supply factors of production (land, labour, capital, entrepreneurship) to firms. Firms, in turn, make factor payments — rent, wages, interest, and profit — back to households for the use of those factors. …

The question is about the circular flow of income in the simplest model of an economy — one with only two sectors: households and firms. There is no government, no foreign trade, and no financial sector in this basic model.

The key idea is that every economy has two kinds of flows: real flows (goods, services, and factors of production) and money flows (payments for those goods and factors). Factor payments are the money payments made to the owners of factors of production — land, labour, capital, and entrepreneurship. These are called rent, wages, interest, and profit.

Now, who owns the factors of production? In a two-sector economy, households own all factors. They supply land, labour, capital, and entrepreneurial ability to firms. Firms use these inputs to produce output. In return, firms pay households for the use of these factors. That payment is the factor payment.

So the direction of the money flow (factor payments) is from firms to households. The correct option is (A). …