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Chapter 7: Q7. (page 152)

Suppose GDP is \(15 trillion, with \)8 trillion coming from consumption, \(2.5 trillion coming from gross investment, \)3.5 trillion coming from government expenditures, and \(1 trillion coming from net exports. Also suppose that across the whole economy, personal income is \)12 trillion. If the government collects \(1.5 trillion in personal taxes, then disposable income is:

a. \)13.5 trillion

b. \(12.0 trillion

c. \)10.5 trillion

d. none of the above

Short Answer

Expert verified

Option (c): $10.5 trillion

Step by step solution

01

Meaning of personal disposable income 

The personal disposable income is the earned or unearned income of the households that they are free to use in whichever way they want to, after all, tax deductions.The earned income is the wages or the salaries of households, and unearned income refers to the public transfer payments made to the households like welfare payments, education payments, unemployment allowances.

The disposable income is what is left after paying taxes. For example, if Eric earns $100,000 in a year and pays $10,000 as taxes every year, his disposable income will be $90,000 per year.

02

Explanation for choosing option ‘c’

If $12 trillion is the personal income and personal tax collection is $1.5 trillion, then the disposable income is personal income -personal taxes; that is $10.5 trillion (=12 trillion-$1.5 trillion). Hence, option c is the correct option.

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Most popular questions from this chapter

Assume that the total value of the following items is \(600 billion in a specific year for Upper Mongoose: net exports = \)50 billion; value of new goods and services produced in the underground economy = \(75 billion; personal consumption expenditures = \)300 billion; value of the services of stay-at-home parents = \(25 billion; gross domestic investment = \)100 billion; government purchases = $50 billion. What is Upper Mongoose’s GDP for the year? What is the size of the underground economy as a percentage of GDP? By what percentage would GDP increase if the value of the services of stay-at-home spouses were included in GDP?

How do “free” products make the calculation of GDP more difficult? What are hedonic adjustments, and why are they necessary? Will inflation tend to be overstated or understated if quality improvements are not accounted for? Explain

Suppose GDP is \(16 trillion, with \)10 trillion coming from consumption, \(2 trillion coming from gross investment, \)3.5 trillion coming from government expenditures, and \(500 billion coming from net exports. Also suppose that across the whole economy, depreciation (consumption of fixed capital) totals \)1 trillion. From these figures, we see that net domestic product equals:

a. \(17.0 trillion

b. \)16.0 trillion

c. $15.5 trillion

d. none of the above

Use the concepts of gross investment and net investment to distinguish between an economy that has a rising capital stock and one that has a falling capital stock. Explain: “Though net investment can be positive, negative, or zero, it is impossible for gross investment to be less than zero.”

Suppose that this year a small country has a GDP of \(100 billion. Also assume that Ig = \)30 billion, C = \(60 billion, and Xn = − \)10 billion. What is the value of G?

a. \(0

b. \)10 billion

c. \(20 billion

d. \)30 billion
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