The country of Aquilonia does not trade with any other country. Its GDP is $30 billion. Its government purchases $5 billion worth of goods and services each year, collects $7 billion in taxes, and provides $3 billion in transfer payments to households. Private saving in Aquilonia is $5 billion. What is consumption?

Question

Quizplus · Accepted Answer

We can find consumption as follows:

GDP = C + I + G + (X-M)

where 
C = consumption 
I = investment 
G = government purchases 
X = exports 
M = imports

Since Aquilonia does not trade with any other country, we have X-M = 0.

Thus,

30 billion = C + I + 5 billion + 0

And we know that private saving (S) equals income (GDP) minus consumption (C) minus taxes (T), plus transfer payments (Tr):

S = GDP - C - T + Tr

Plugging in the given values, we have:

5 billion = 30 billion - C - 7 billion + 3 billion

Solving for C, we get:

C = 21 billion

Therefore, the answer is B.

The Country of Aquilonia Does Not Trade with Any Other