Question

The fictional school: Oakland Community College increases the income tax rate so that tax revenues increase by $70 million. Government spending also increases by $70 million and consumption falls by $10 million. If GDP remains the same and Oakland Community College is a closed economy, then investment a. increases by $140 million. b. increases by $70 million. c. decreases by $60 million. d. decreases by $80 million.

Answer 1

Answer: c. decreases by $60 million

Explanation:

The formula for Gross Domestic Product (GDP) in a closed economy using the Expenditure method is;

GDP = Consumption + Government Spending + Investment

Therefore;

Investment  = GDP - Consumption - Government Spending

GDP remained the same = $0

Consumption fell by $10 million = -$10 million

Investment = 0 - (-10) - 70

Investment = - $60 million