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Assume that GDP (Y) is $6000, personal disposable income (Yd) is $5100, and the government budget...

Assume that GDP (Y) is $6000, personal disposable income (Yd) is $5100, and the government budget deficit (BD) is $200. Consumption (C) is $3800 and the trade deficit is $100. Also, assume that Yd = Y+TR-TA, where TR are the government transfers and TA are the taxes.

a. How large is saving (S)?

b. How large is investment (I)?

c. How large is government spending (G)?

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Homework Answers

Answer #1

(a) Private saving = Y - TA + TR - C = Yd - C = 5100 - 3800 = 1300

Public Saving = TA - TR - G(Government Spending) and as it is given that Government has a Budget Deficit = 200.

Hence Public Saving = -200

Hence National Saving = Private Saving + Public Saving = 1300 - 200 = 1100

Hence, Saving will be $1100

(b) In a closed economy

Y = C + I + G and Saving = Y - TA + TR - C + TA - TR - G = Y - C - G

=> I = Y - C - G = Saving

=> Investment = $1100

(c) Y = C + I + G

=> 6000 = 3800 + 1100 + G

=> G = 6000 - 3800 - 1100 = 1100

Hence Government Spending = $1100

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