Assume a closed economy in which GDP is $20 trillion, consumption spending is $16 trillion, and government spending is $2 trillion. If the government imposes taxes of $2 trillion, what is the level of investment spending?

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BlackTom AI · Accepted Answer

To begin, let's restate the core economic identity for a closed economy: Y = C + I + G, since there is no external trade (no net exports). Here, given Y (GDP) = 20 trillion, C = 16 trillion, and G = 2 trillion, we can solve for investment I.
Option 1: $4 trillion. If we plug numbers into Y = C + I + G, we would have 20 = 16 + I + 2, which yields I = 2. Therefore, $4 trillion would overstate investment and is inconsistent with the given data.
Option 2: $2 trillion. Using the identity, 20 = 16 + I + 2, we get I = 20 − 16 − 2 = 2. This matches the calculated investment level, so this option is correct mathematically under the given conditions.
Option 3: $18 trillion. Substituting I = 18 into the identity gives C + I + G = 16 + 18 + 2 = 36, which would imply GDP of 36 trillion, not the provided 20 trillion. This is clearly invalid here.
Option 4: −$4 trillion. If I = −4, then C + I + G = 16 + (−4) + 2 = 14, implying GDP of 14 trillion, which contradicts the given GDP of 20 trillion. Negative investment is not supported by these data.
In summary, the only option that satisfies the identity Y = C + I + G with the provided numbers is I = 2 trillion, so the level of investment spending is 2 trillion.

Assume a closed economy in which GDP is $20 trillion, consumption spending is $16 trillion, and government spending is $2 trillion. If the government imposes taxes of $2 trillion, what is the level of investment spending?

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Assume a closed economy in which GDP is $20 trillion, consumption spending is $16 trillion, and government spending is $2 trillion. If the government imposes taxes of $2 trillion, what is the level of investment spending?

View Explanation

Log in for full answers

Similar Questions

Suppose GDP is $300 million, depreciation is $10 million, net payments to the rest of the world are $30 million, and statistical discrepancy is $8 million. What is the value of national income?

For an economy as a whole,[Fill in the blank]

Which of the following purchases do national income accountants consider to be investment?

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GNP equals GDP income earned domestically by foreigners income that nationals earn abroad.