Money does not stop when it is spent — it keeps moving. Follow it from households to firms, back again as income, into banks as savings, and out once more as loans.
Currency circulation is the repeated movement of money through an economy. Rather than being used once and stopping, the same money is spent, earned and spent again. This diagram rounds up the simplest version into three actors — households, firms and banks — and the flows of money between them.
Set out as a loop, the picture makes one point clear: an economy does not need a huge stock of money to support a lot of activity, as long as the money keeps moving.
Because every flow has a partner. One person's spending is another person's income, and one person's saving is a loan that another person invests. Seeing the loop makes those pairings obvious and shows where money leaves the direct spending cycle and comes back through the banks.
The loop has two main actors. Households own the labour and resources a firm needs; firms turn those into goods and services. Money moves back and forth between them along two of the four flows.
When households buy goods and services, money leaves them and arrives at firms as sales revenue. This is the flow that turns what people want into what firms earn.
Firms pay out wages, rent and profit. That money returns to households and becomes the income they can spend or save, so the loop can start again.
What a household does not spend today can be placed with a bank as savings. Money that would otherwise sit idle is gathered together instead of stopping the loop.
Banks lend the pooled savings to firms as loans. Firms spend that money on investment, which feeds production and completes the wider circuit through the banking channel.
It is the repeated movement of money through an economy. The same money is spent, earned and spent again, passing between households, firms and banks instead of being used once and stopping.
Households provide the labour and resources firms need, and firms provide the goods and services households want. Money flows in opposite directions to the real goods and work, linking the two sides.
Banks collect the income that households do not spend and lend it to firms that want to invest. That puts idle savings back to work and adds a second channel beside direct spending.
In this simplified model the money is a fixed stock that keeps circulating. It is not consumed by being spent — it simply moves from one holder to the next and returns again.
No. It is a heavily simplified teaching model. Real economies have many more actors, prices, taxes and delays, and money can be created through credit. The loop here exists to show the basic idea of circulation.