Question

In a closed economy, GDP is $1000, government purchases are $200, and consumption is $700. If the government has a budget surplus of $25, what are investment, taxes, private saving, and national saving?

Answer 1

Answer:

a) $100 b) $925 c) $75 d) $25 e) $100

Explanation:

GDP = $1,000

Government purchases = $200

Consumption = $700

Budget surplus = $25

We use the formula

GDP = consumption + Investment + government spending.

zero imports and exports because it's a closed economy.

1) Investment = GDP - ( consumption + government spending)

I = $1000 - $900

Investment = $100

National savings (a.k.a. investment) = public savings + private savings = $100

Public savings = Budget surplus = $25

Private savings = National savings - Public savings

Private savings = $100 - $25 = $75

budget balance = Taxes - expenditure

$25 =Taxes - ($700 + $200) = $925