Question

The country of Growpaw does not trade with any other country. Its GDP is $20 billion. Its government purchases $3 billion worth of goods and services each year, collects $4 billion in taxes, and provides $2 billion in transfer payments to households. Private saving in Growpaw is $4 million. What is investment in Growpaw?a. $5 billion

b. $4 billion
c. $3 billion
d. $2 billion

Answer 1

C) $3 billion

Step-by-step explanation:

Step one: calculate disposable income

Disposable income = GDP - taxes collected + transfer payments

Disposable income = $20 - $4 + $2 = $18

Step two: calculate private consumption

Private consumption = disposable income - savings

Private consumption = $18 - $4 = $14

Step three: calculate investment

Investment = GDP - consumption - government purchases

= $20 - $14 - $3 = $3