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Scenario: Open Economy S = I In an open economy GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. Look at the scenario Open Economy S = I. How much is investment spending? a. $3 trillion b. $2 trillion c. $3.5 trillion d. $4 trillion

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Answer:

D. $4 trillion

Explanation:

Given that

GDP = 12 trillion

C = 8 trillion

G = 2 trillion

T = 0.5 trillion

X = 1 trillion

M = 3 trillion

Recall that

I = national savings + (M - X)

And national savings = GDP - C - G

Thus

National savings = 12 - 8 - 2

= 2 trillion

Thus,

I = 2 + (3 - 1)

I = 2 + 2

I = 4 trillion.

Therefore, investment spending is $4 trillion

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