Question

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

Option (c): $10.5 trillion

Step-by-step solution

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.

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.