Differentiate between public and private savings using the national income accounts equation and explain the significance...

Differentiate between public and private savings using the national income accounts equation and explain the significance of each type of savings. Use the loanable funds market diagram to show what happens to interest rate and quantity of loanable funds if government revenues exceed its spending? Explain why it is important for a nation to increase savings? Label the diagram completely. You can draw the graph with a pen and insert a picture here.

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Expert Solution

Private savings is household income which is not used for consumption or for paying taxes wheras public savings is what government saves..Private saving is Y-T+TR-C(Y is income,T is taxes,TR is transfers,and C is consumption).Public saving is T-G-TR which is government revenue through taxes minus government expenditure on goods and services minus transfers. A country's national savings is the sum of private and public savings.National savings is equal to the nation's income minus consumption and government taxes.

Budget deficit occurs when government spending exceeds government revenue.Government budget deficit means negative public saving and reduces national saving .Thus a government deficit budget lessens the supply of loanable funds , raises the interest rate and lessens investment.In a closed economy the impact of budget deficit is on national savings and on the supply of loanable funds . The supply curve shifts to the left as supply of loanable funds gets reduced.Interest rate rises from r1 to r2.In the open economy,reduction in the supply of loanable funds and increase in the interest rate reduces net capital outflow.

Savings help the economy to grow.Personal savings allow banks to extend loan to businesses which is used in investment on capital goods.More goods are produced which leads to the growth of the GDP in the country.

Rahul Sunny answered 1 year ago

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