Question

# 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)?

(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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