12) You have some estimates of national accounts numbers for a closed economy fo

Question

12) You have some estimates of national accounts numbers for a closed economy for the coming year. Under one set of expectations, government purchases will be $30 billion, transfer payments will be $10 billion, and taxes will be $45 billion. Under another set of expectations, GDP will be $200 billion, taxes will be $50 billion, transfer payments will be $20 billion, consumption will be $120 billion, and investment will be $40 billion. Based on these numbers in the first case there should be a a. $15 billion surplus, and in the second case a $10 billion surplus. b. $15 billion surplus, and in the second case a $30 billion deficit. c. 5 billion surplus, and in the second case a $10 billion deficit. d. $5 billion surplus, and in the second case a $30 billion deficit.

Explanation / Answer

12.

Correct Answer:

C. $5 billion surplus, and in the second case a $10 billion deficit

Explanation:

In first case:

Surplus = tax collection – government purchases – transfer payment = 45 – 30 – 10 = $5 billion

In second case:

Government purchase = GDP – consumption – investment = 200 – 120 – 40 = $40 billion

Deficit = government purchases + transfer payment – tax collection = 40+20 – 50 = $10 billion

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