Question

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).)

GDP = $1,000 million	G = $100 million
C = $850 million	X = $100 million
T = $50 million	IM = $125 million

What is the level of investment spending and private savings, and what are the budget balance and capital inflow?

A)	Investment spending is $75 million, private savings is $100 million, the budget balance is -$50 million and capital inflow is -$25 million.
B)	Investment spending is $75 million, private savings is $100 million, the budget balance is -$50 million and capital inflow is $25 million.
C)	Investment spending is $75 million, private savings is $75 million, the budget balance is -$50 million and capital inflow is $25 million.

Answer 1

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.