Consider a closed economy without a government. If the saving rate in the economy is 20 percent and the aggregate saving is $10,000, the aggregate consumption in the economy is ________.

Question

Quizplus · Accepted Answer

In a closed economy without a government, the entire income is either saved or consumed. If the saving rate is 20%, then 80% of the income is consumed. Given that savings are $10,000, which represents 20% of the total income, the total income is $50,000 ($10,000 / 20%). Therefore, aggregate consumption, which is 80% of the total income, is also $40,000, not $50,000. My previous explanation contained a calculation mistake. The correct interpretation should be that if $10,000 represents 20% of the income as savings, then the total income is indeed $50,000, but the question directly asks for the aggregate consumption given the savings, not to recalculate the total income or its distribution. The correct approach to directly answer the question was to infer the total income and deduce consumption from it, which was not accurately addressed in my response.

Consider a Closed Economy Without a Government