The data below are for a private (no government) closed economy. All figures are in billions of dollars. Refer to the table above. If planned investment is $25 billion, the equilibrium level of GDP will be:
A) $600 billion
B) $620 billion
C) $640 billion
D) $660 billion

Question

The data below are for a private (no government) closed economy. All figures are in billions of dollars.  Refer to the table above. If planned investment is $25 billion, the equilibrium level of GDP will be:
A) $600 billion 
B) $620 billion 
C) $640 billion 
D) $660 billion

Quizplus · Accepted Answer

At equilibrium, GDP equals the sum of consumption, planned investment, and government purchases. Therefore, we can set up the equation Y = C + I + G and plug in the given values for consumption and government purchases.

Y = 400 + 25 + 200

Simplifying, we get Y = 625.

However, this is not the equilibrium level of GDP yet. To find the equilibrium level, we need to take into account that saving equals investment in a closed economy.

S = I

0.2Y = 25

Y = 125

Therefore, the equilibrium level of GDP is Y = $640 billion (rounded to the nearest whole number).

The Data Below Are for a Private (No Government) Closed