Chapter 5R, Problem 2MCQ

To determine

The correct option that defines the true statement where the economy has no government and no interaction with other countries.

Answer to Problem 2MCQ

Option e is correct.

Explanation of Solution

Explanation for the correct option:

e.

In a simplified economy where there is no government and no interaction with other countries, in such case total spending is equivalent to total income. In this, total spending is equal to consumer spending and investment spending whereas total income is equal to the sum of consumer spending and savings.

If both equations are equated, then investment spending will be equal to savings in a simplified economy as a whole. Therefore, option e is correct.

Explanation for incorrect options:

a.

Total spending is the sum of consumer spending and investment spending but it is not necessary that consumer spending is equivalent to investment spending. Therefore, option a is incorrect.

b.

In a simplified economy, total income is equal to total spending. Total spending where includes both consumer spending and investment spending. Therefore, option b is incorrect.

c.

Total income is equal to consumer spending plus savings rather than investment spending plus savings. Therefore, option c is incorrect.

d.

Investment spending will be equivalent to total spending minus consumer spending. Therefore, option d is incorrect.

Economics Concept Introduction

Interest rates: The rates that were charged by the investor who is ready to lend his/her money for a certain period of time to the borrower.