Question

I need a step by step solution of the following problem;

(Figure 7-2: Expanded Circular-Flow Model) Government purchases of goods and services = $200 Government borrowing = $70 Government $150 = Taxes Government transfers = $20 Private savings = $170 Consumer spending = $700 Households Wages, profit, interest, rent = $1,000 Markets for goods and services Factor markets Financial markets Gross domestic product Wages, profit, interest, rent - $1,000 Borrowing and stock issues by firms = $120 Firms Investment spending - $120 Exports = $30 Foreign borrowing and sales of stock - $110 Rest of world Imports - $50 Foreign lending and purchases of stock = $130 Use Figure 7-2: Expanded Circular-Flow Model How much is total government spending? © $220 $20 $370 O $200

Answer 1

Answer: $220

Government spending can be financed by government borrowing, or taxes.

Government spending = Government borrowing + Taxes

Government spending = $70 + $150

Government spending = $220

($200 which is used for government purchase is spent from the above calculated amount)