Consider an economy with a real income of $10,000, consumption spending of $7,000, and net tax...

Consider an economy with a real income of $10,000, consumption spending of $7,000, and net tax revenue of $2,000.
a. Calculate domestic private saving and Suppose government spending is $2,000. What is the public saving?
b. Continuing from part last part, what is national saving?

c Continuing from part b, suppose net foreign investment is -$3,000. What is private domestic investment spending?

Solutions

Expert Solution

(a) Domestic Private Saving = Income - Consumption - Tax Revenue

= 10,000 - 7000 - 2000 = $1000

=> Domestic Private Saving = $1000

Public Saving = Tax Revenue - Government Spending

= 2000 - 2000 = $0

=> Public Saving = $0

(b) National Saving = Public Saving + Private Saving = 0 + 1000 = $1000

=> National Saving = $1000

=> I = Y - C - G - NX -------------------(1)

where C = consumption. I = Investment , G = Government Expenditure and NX = Net Exports

S(National Saving) = Private Saving + Public Saving = (Y - C - T) + T - G = Y - C - G ------------------(2)

From (1) and (2) We have

I(Domestic investment) = National Saving - NX

and NX = Net Foreign Investment

=> Domestic investment = National Saving - Net Foreign Investment

= 1000 - (-3000) = $4000

=> Domestic investment = $4000

Rahul Sunny answered 1 year ago

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