Question 49

Consumption is affected when a parent pays for a child's college education.

When a parent pays for a child's college education, it directly influences the consumption component of GDP. This is because the payment is considered a personal expenditure on services, which contributes to the overall consumption within the economy.

A) Net exports

Net exports represent the value of a country's exports minus its imports. This choice is incorrect in the context of the question as it does not relate to personal expenditures on education and is not directly influenced by a parent's payment for their child's college tuition.

B) Investment

Investment refers to the purchase of goods that will be used to produce other goods and services in the future, such as business inventories or physical capital. While education can be seen as an investment in human capital, the specific act of paying tuition does not directly categorize as investment in terms of GDP components.

C) Consumption

Consumption is the correct answer because it encompasses all private expenditures by households and non-profit institutions. Payments made by parents for their child's college education fall under this category as they represent spending on educational services, thereby contributing to the GDP.

D) Government purchases

Government purchases include spending on goods and services by the government sector. This option is not applicable here because the payment for a child's college education is made by parents, not the government, thus it does not influence this component of GDP.

Conclusion

The correct answer is consumption because the payment for college education is a direct household expenditure that contributes to GDP. Other options, such as net exports, investment, and government purchases, do not accurately reflect the nature of this financial transaction, making them incorrect in this context.