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?
A) $10 billion
B) $13 billion
C) $18 billion
D) $21 billion

Question

Quizplus · Accepted Answer

GDP = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (NX). Since Aquilonia does not trade, NX = 0. Given that GDP = $30 billion, G = $5 billion, and private saving = $5 billion (which equals I in a closed economy with no government deficit or surplus), we can solve for C: $30 billion = C + $5 billion + $5 billion. Thus, C = $30 billion - $10 billion = $20 billion. However, considering government transfers ($3 billion) as part of disposable income, which could also contribute to consumption, the correct calculation should directly focus on the components provided: GDP = C + I + G. With the provided numbers, we directly calculate C as part of GDP, not explicitly accounting for transfers in this equation, leading to a misunderstanding in the explanation. The correct approach to find consumption involves understanding that consumption is part of GDP not directly tied to the given figures of government spending, taxes, and savings.

The Country of Aquilonia Does Not Trade with Any Other