Question

Government deficits mean that

a. public saving is negative so national saving is negative.

b. national saving is negative so public saving is negative.

c. national saving is negative so public saving is lower than otherwise.

d. public saving is negative so national saving is lower than otherwise.

Answer 1

Let's try to understand what is meant by Budget surplus, public, and national savings and then see what budget deficit means.

For a closed economy,

Y = C + I + G

where Y is the level of GDP or Output

I: Investments

G: Government expenditure

Now, National savings is nothing but the amount of remaining income that is not consumed or spent by the government.

National saving = Y - C - G = I

We can divide the national saving into two parts - Public and private saving

I = (Y - T + TR - C) + (T - G - TR)

where

(Y-T+TR-C) is private saving and (T-G-TR) is public savings.

Public saving is also known as the budget surplus.

Now, given that there is a government deficit meaning (Y-G-TR) < 0

or Y < G + TR

Thus, if there is a government deficit, it would mean public saving is negative and national saving is lower than otherwise.

Option D is the correct answer.