The country of Cedarland does not trade with any other country. Its GDP is $17 billion. Its government purchases $4 billion worth of goods and services each year, collects $6 billion in taxes, and provides $1 billion in transfer payments to households. Private saving in Cedarland is $4 billion. For Cedarland,
A)investment is $6 billion and consumption is $9 billion.
B)investment is $6 billion and consumption is $8 billion.
C)investment is $5 billion and consumption is $8 billion.
D)investment is $5 billion and consumption is $7 billion.

Question

Quizplus · Accepted Answer

To find investment, use the formula: GDP = C + I + G, where C is consumption, I is investment, and G is government spending. Rearranging gives I = GDP - C - G. Given GDP = $17 billion, G = $4 billion, and private saving = $4 billion, we find public saving = taxes - government spending - transfer payments = $6 billion - $4 billion - $1 billion = $1 billion. Total saving = private saving + public saving = $4 billion + $1 billion = $5 billion, which equals investment. Thus, I = $5 billion. Consumption C = GDP - I - G = $17 billion - $5 billion - $4 billion = $8 billion.

The Country of Cedarland Does Not Trade with Any Other