define saving and investment data for the simple economy of Newt show that in 2018 saving...

define saving and investment data for the simple economy of Newt show that in 2018 saving exceeded investment and the government is running a balance budget. What is likely to happen? what would happen if the government were running a deficit and saving were equal to investment?

Solutions

Expert Solution

Balanced budget refers to a situation when expenditure of the government is equal to the revenue earned by the government through taxation . Neither budget surplus or budget deficit exist in such situation.

Saving refers to the part of income which is not consumed. Investmennt refers to the expenditure on machines and other inputs used in production.

Aggregate output =C+S+T

Aggregate expenditure =C+I+G where C is consumption,S is saving,T is tax revenue,G is government expenditure,I is investment. Aggregate expenditure is equal to aggregate output in equilibrium.So C+I+G=C+S+T;S+T=I+G

When saving is more than investment ie S>I and government has a balanced budget ie G=T there is less consumption and accumulation of unsold inventories in the country . In such situation Producer will produce less in next year..

When saving is equal to investment ie S=I,and government has a deficit budget ie G>T, then aggregate output will be less than aggregate expenditure and there will be less inventory. Producer will produce more next year.

Rahul Sunny answered 2 years ago

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