Question

5. Suppose that in a closed economy GDP is $1,100 million, consumption is $750 million, and taxes are $200 million. What value of government purchases would make national savings equal to $100 million and at that value would the government have a deficit or surplus?
A. $100 million, deficit
B. $100 million, surplus
C. $150 million, surplus
D. $250 million, deficit
E. $250 million, surplus

6. Which of the following statements is (are) correct?
(x) If an economy is closed with private saving equal to $2 trillion, national saving of $3 trillion, consumption of $7 trillion, government purchases of $1 trillion and no transfer payments, then GDP is $11 trillion.
(y) In a closed economy, if Y remained the same, but G rose, T rose by the same amount as G, and C fell but by less than the increase in T, then both private and national saving would fall.
(z) In a closed economy, if private saving exceeds investment then G is greater than T and the government is experiencing a budget deficit.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (x) only

Answer 1

1) Solution: $250 million, deficit

Working: National saving = Y – C – G =$ 1100 - $750 – G = $100

It gives, G = $250

Public saving = T - G = $200 - $250 = -$50 (deficit)

　

2) Solution: (x) and (y) only

Working:

1) 1st option is true

National saving (Y) = Private saving + Public saving

$3 trillion = $2 trillion + Public saving

Public saving = $ 1 trillion

　

Public saving = (T – G) = Taxes-Transfer Payment-Government

Public saving = Taxes - 0 - $1 trillion = $1 trillion

Taxes = $2 trillion

　

Private saving = (Y – T – C) = (Y(Income)+ Transfer Payment)-T(Taxes)-C(consumption)

Private saving = (Y + 0 ) - Taxes - $7 trillion = $2 trillion

Y = $9 trillion + Taxes = $9 trillion + $2 trillion = $11 trillion

　

National saving = Y – C – G =$ 11000 – $7500 – G = $1000

Therefore , G = $2500 Budget = T – G = $2000 – $2500 = -$500 (deficit)

　

2nd option: In a closed economy, if Y is constant, but G rose, Taxes and G increases with the same amount and consumption decreases but by less than the increase in T, both national saving as well as private saving would decline