|Use the following information about the open economy of Regalia
to answer the question below. There are no government transfers.
(Hint: capital inflow = the value of imports (IM) minus the value
of exports (X).)
What is the level of investment spending and private savings, and what are the budget balance and capital inflow?
At equilibrium we have : GDP(Y)= C + I + G + X - IM
=> I = GDP- C - G - X + IM
=> I = 1000 million - 850 million - 100 million - 100 million + 125 million = 75 million
Hence, Investment = $75 million
Private Saving = Y - C - T = 1000 million - 850 million - 50 million = 100 million
Hence, Private saving = $100 million
Public saving(or budget balance) = T - G 50 million - 100 million = -50 million
Hence, budget balance = -$50 million.
Net exports(NX) = X - IM = 100 million - 125 million = -25 million.
Net capital inflow = -NX = -(-25 million) = 25 million.
Hence, capital inflow = 25 million
Hence, the correct answer is (B) Investment spending is $75 million, private savings is $100 million, the budget balance is -$50 million and capital inflow is $25 million.
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