Question

In an open economy, GDP is $8 trillion this year. Consumption is $6 trillion, and government spending is $1 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $2 trillion. The government is running a budget ______ and investment spending is equal to _____.

Answer 1

Deficit; $2 trillion

Step-by-step explanation:

Given that,

GDP = $8 trillion this year

Consumption = $6 trillion

Government spending = $1 trillion

Taxes = $0.5 trillion

Exports = $1 trillion

Imports = $2 trillion

GDP = Consumption + Government spending + Investment spending + Net exports

$8 = $6 + $1 + Investment spending + ($1 - $2)

$8 = $7 + Investment spending + (-$1)

$9 - $7 = Investment spending

$2 trillion = Investment spending

The government is running a budget deficit because the amount of government spending exceeds the amount of tax revenue.