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Suppose the U.S. has a closed economy with GDP (Y) equal to $19.4 trillion, consumption (C)...

Suppose the U.S. has a closed economy with GDP (Y) equal to $19.4 trillion, consumption (C) equal to $12.4 trillion, government spending (G) equal to $3.4 trillion, transfer payments (TR) equal to $1.6 trillion, and taxes (T) equal to $4.7 trillion. Suppose the government increases its spending on national defense such that government spending increases by $0.2 trillion. What must happen to total savings (S)? That is, what is the dollar amount by which total savings changes? Assume the values for GDP, consumption, taxes, and transfer payments do not change. Provide your answer in trillions of dollars rounded to one decimal place.

Solutions

Expert Solution

GDP(Y) = $19.4 trillion

Consumption(C) = $12.4 trillion

Government spending (G) = $3.4 trillion

Transfer payment (TR) = $1.6 trillion

Taxes (T) = $4.7 trillion

Calculate the private saving -

Private saving = Y + TR - C - T

Private saving = $19.4 trillion + $1.6 trillion - $12.4 trillion - $4.7 trillion

Private saving = $3.9 trillion

The private saving is $3.9 trillion

Calculate the public saving -

Public saving = T - G - TR

Public saving = $4.7 trillion - $3.4 trillion - $1.6 trillion = -$0.3 trillion

The public saving is $ -0.3 trillion.

Calculate the Total Saving -

Total saving = Private saving + Public saving = $3.9 trillion - $0.3 trillion = $3.6 trillion

The total savings is $3.6 trillion.

Now, the government spending increases by $0.2 trillion.

New government spending = $3.4 trillion + $0.2 trillion = $3.6 trillion

Calculate the new level of public saving -

New level of public saving = T - G - TR = $4.7 trillion - $3.6 trillion - $1.6 trillion = -$0.5 trillion

The new level of public saving is -$0.5 trillion.

Calculate the new level of total savings -

New level of total savings = Private savings + New level of public saving = $3.9 trillion - $0.5 trillion = $3.4 trillion

The new level of total savings is $3.4 trillion.

Calculate the change in total savings -

Change = New level of total savings - Initial total savings

Change = $3.4 trillion - $3.6 trillion = -$0.2 trillion

The change in total savings is -$0.2 trillion.

This means that total savings has decreased by $0.2 trillion.

Rahul Sunny answered 1 year ago

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