Question

Which of the following would reduce GDP by the greatest amount?

• a $20 billion decrease in government spending

• $20 billion decreases in both government spending and taxes

• a $20 billion increase in taxes

• $20 billion increases in both government spending and taxes

If the equilibrium level of GDP in a private open economy is $1,000 billion and consumption is $700 billion at that level of GDP, then

• saving must be $300 billion.

• S + C must equal $300 billion.

• I_g + X_n must equal $300 billion.

• net exports must be $300 billion.

Answer 1

Part 1) Among the options a $20 billion decrease in government spending would reduce the gross domestic product (GDP) by the greatest amount. This is because a reduction in taxes will increase the level of income by raising the disposable income thereby contributing to increase in consumption. Increased consumption will result in increased demand that will result in an increased level of income. On the other hand, an increase in government spending will increase the level of income.

Part 2) If the equilibrium level of GDP in a private open economy is $1,000 billion and consumption is $700 billion at that level of GDP, then saving must be $300 billion. This is because

Consumption + Saving = Income. So,

$700 billion + Saving = $1,000 billion

Saving = $300 billion