Question

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?

A.$2 Trillion
B.$-4 Trillion
C.$4 Trillion
D.$18 Trillion

Answer 1

The level of investment spending in the closed economy with given GDP, consumption, and government spending, is $2 trillion.

Step-by-step explanation:

In a closed economy where GDP equals the sum of consumption, investment, and government spending, the formula for GDP is:

GDP = Consumption + Investment + Government spending

Given the values:
GDP = $20 trillion
Consumption = $16 trillion
Government spending = $2 trillion
Taxation does not directly enter the equation for GDP calculation but affects the disposable income and savings which influence investments.

Therefore, we can deduce the Investment (I) by re-arranging the GDP formula:

GDP - Consumption - Government spending = Investment

Investment = $20 trillion - $16 trillion - $2 trillion = $2 trillion

That means the level of investment spending is $2 trillion, which corresponds to option A.