Consider a closed economy without a government and without international trade. What will be TRUE when this economy is in equilibrium?
A) Total planned real investment spending will exceed total planned real expenditures.
B) Planned real investment spending will exceed real planned saving.
C) Planned real consumption spending equals real GDP.
D) Planned real consumption spending plus planned real investment spending equals real GDP.

Question

Quizplus · Accepted Answer

In a closed economy without government and international trade, there are only two sectors, households and firms. Total output, which is real GDP, is the total amount of goods and services produced in the economy, which is bought by the households. These transactions between households and firms give rise to two categories of demand: consumption expenditure and investment expenditure. In equilibrium, the total expenditure (consumption + investment) must equal the total output (GDP) because any imbalance between the two would lead to unplanned inventory buildup or depletion, and firms would adjust their production levels accordingly. Thus, planned real consumption spending plus planned real investment spending equals real GDP, which makes option D the correct answer. Options A and B are incorrect because planned investment spending is a part of total planned expenditures, and planned saving is not a relevant concept in this scenario. Option C is also incorrect because it ignores the investment component of aggregate demand.

Consider a Closed Economy Without a Government and Without International