Question

5. If a country runs a current account surplus and national private savings equals domestic investment, then the combined governmental accounts must be ________. A) balanced B) in deficit C) in surplus D) could be either negative or positive, depending on the capital account. 6. For an economy, if its national saving is greater than its domestic investment, then which of the following is true? A) this economy must have a current account surplus. B) this economy must have a financial account surplus. C) this economy’s government budget must be in surplus. D) all of the above.

Answer 1

Solution:

Private Savings, Ps = income - consumption - tax = Y - C - T

Public/government savings, Pg = tax - government = T - G

So, national savings = Ps + Pg

S = Y - C - G

Current account, CA = savings - investment = S - I

5. So, if CA surplus exists, it means S > I

Hence, Y - C - G > I ... (1)

Also, Ps = I, so Y - C - T = I ... (*)

So, adding and subtracting T in (1), we get

Y - C - T - G + T > I

So, using (*), this becomes I - G + T > I

Or, T - G > 0, meaning that the government faces a surplus.

Correct option is (C) in surplus.

6. Again, using above equations

S > I so S - I > 0

Since CA = S - I > 0 so, current account shows a surplus.

Rest of the options do not necessarily have to be true.

So, correct option is A) this economy must have a current account surplus.