In Macroeconomics, we learn that the circular flow diagram is a simple economic model that illustrates the flows of goods and services through the economy. Can the arrow that connects the "Financial Market" sector of the economy to the "Firm" sector be double-headed?

Traditionally, in the class, I've learned that Firms borrow money from the financial market to make investments in capital (so the arrow is always pointing from the Financial Market to the Firms), but I've never seen a situation where money flows from the Firms into the Financial Market.

Can this occur? And if so, can you give an example of when?


  • $\begingroup$ A firm issuing stocks comes to my mind. $\endgroup$
    – E. Sommer
    Jan 22, 2019 at 10:20

1 Answer 1


Yes! I put together this sketch to show it

enter image description here

For example

  1. Households can save money in banks, which inject money into the financial market
  2. They are later compensated the form of a rate of return
  3. Firms can borrow money
  4. Later they need to pay an interest. This way the money flows from the firms back to the financial market
  • $\begingroup$ That makes perfect sense and I thought about that as well, but my professor never showed the diagram with that scenario, so I wasn't sure if it was plausible or not. Thank you so much! $\endgroup$
    – Ryan
    Jan 19, 2019 at 19:43
  • $\begingroup$ @Ryan Happy to help $\endgroup$
    – caverac
    Jan 19, 2019 at 20:09

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