Question

# Use the following information about the open economy of Regalia to answer the question below. There...

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.

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.

#### Earn Coins

Coins can be redeemed for fabulous gifts.