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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

Below is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income measures by both the expenditures and income approaches. The results you obtain with the different methods should be the same.

  1. Using the above data, determine GDP by both the expenditures approach and the income approach. Then determine NDP.

  2. Now determine NI in two ways: first, by making the required additions or subtractions from NDP; and second, by adding up the types of income and taxes that makeup NI.

  3. Adjust NI (from part b) as required to obtain PI.

  4. Adjust PI (from part c) as required to obtain DI.

Why do national income accountants compare the market value of the total outputs in various years rather than actual physical volumes of production? What problem is posed by any comparison over time of the market values of various total outputs? How is this problem resolved?

Suppose that in 1994 the total output in a single-good economy was

7,000 buckets of chicken. Also suppose that in 1994 each bucket of chicken was

priced at \(10. Finally, assume that in 2015 the price per bucket of chicken was

\)16 and that 22,000 buckets were produced. Determine the GDP price index for

1994, using 2015 as the base year. By what percentage did the price level, as

measured by this index, rise between 1994 and 2015? What were the amounts of

real GDP in 1994 and 2015?

Suppose that this year鈥檚 nominal GDP is \(16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level 5 years ago. Using that index, we find that this year鈥檚 real GDP is \)15 trillion. Given those numbers, we can conclude that the current value of the index is:

a. higher than 100.

b. lower than 100.

c. still 100.

How do 鈥渇ree鈥� 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
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