The country of Trenton does not trade with any other country. Its GDP is $925. I

Question

The country of Trenton does not trade with any other country. Its GDP is $925. Its government purchases $126 worth of goods and services each year, collects $171 in taxes, and provides $49 in transfer payments to households. Private saving in Trenton is $273. What is investment in Trenton? Step by Step

The country of Trenton does not trade with any other country. Its GDP is $925. Its government purchases $126 worth of goods and services each year, collects $171 in taxes, and provides $49 in transfer payments to households. Private saving in Trenton is $273. What is investment in Trenton? Step by Step

Explanation / Answer

Using Keynesian Model

G = $126

T = $171

P = $49

Y = C + I + G

where I is private investment

C = a + cYd

where a is autonomous consumption

c is Marginal Propensity to consume

Yd is disposable income

C = a + c(Y-T+P)

S = Yd - C = $273

Investment = S - G - P + T = $269

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