Question

Assume the following information for an imaginary, open economy.  

Consumption = $1,000; investment = $300; net exports = $100;
taxes = $230; private saving = $200; and national saving = $150.

Refer to Scenario 26-3. This economy’s government is running a

	a.	budget surplus of $50.
	b.	budget deficit of $80.
	c.	budget deficit of $50.
	d.	budget surplus of $80.

Answer 1

To calculate budget deficit or surplus, we first need to find government expenditure.

In equilibrium, in open economy, we have

Y = C + I + G + NX

where, Y = national income, C is consumption, G is government expenditure, NX is net export

Private savings = Y - T - C

where, T is tax

Thus, we have

200 = Y - 230 - 1000

or, Y = 200 + 1230

or, Y = 1430

National savings = Y - C - G

or, 150 = 1430 - 1000 - G

or, G = 430 -150

or, G = 280

Thus, Public savings = T - G

or, Public savings = 230 - 280

Thus, public savings = -$50

Thus government runs a budget deficit of $50