Question

In: Economics

Suppose the U.S. has a closed economy with GDP (Y) equal to $20.3 trillion, consumption (C)...

Suppose the U.S. has a closed economy with GDP (Y) equal to $20.3 trillion, consumption (C) equal to $12.0 trillion, government spending (G) equal to $3.9 trillion, transfer payments (TR) equal to $1.8 trillion, and taxes (T) equal to $4.2 trillion.

Suppose the government passes legislation to reduce the size of its debt by reducing government spending by $0.4 trillion. What must happen to total savings (S)? That is, what is the dollar amount by which total savings changes? Assume the values for GDP, consumption, taxes, and transfer payments do not change. Provide your answer in trillions of dollars rounded to one decimal place. Use a negative sign "-" for negative changes. Do not include any symbols, such as "$," "=," "%," or "," in your answer.

Expert Solution

Solution :-

Y (GDP) = $20.3 trillion

C ( Consumption) = $12.0 trillion

G ( Government Spending ) = $3.9 trillion

TR ( Transfer Payment ) = $1.8 trillion

T ( Taxes ) = $4.2 trillion

Private savings = Y - T + TR - C = $20.3 - $4.2 + $1.8 - $ 12.0 = $5.9 trillion

Public spending = T - G - TR = $4.2 - $3.9 - $1.8 = - $1.5 trillion

National saving( Total savings ) = Private savings + Public savings = $5.9 trillion - $1.5 trillion = $4.4 trillion

Now the government spending after Reduces by $0.4 trillion = $3.9 - $0.4 = $3.5 trillion

Private savings = Y - T + TR - C = $20.3 - $4.2 + $1.8 - $ 12.0 = $5.9 trillion

Public spending = T - G - TR = $4.2 - $3.5 - $1.8 = - $1.1 trillion

National saving ( Total savings ) = Private savings + Public savings = $5.9 trillion - $1.1 trillion = $4.8 trillion

So Increase in total savings = $4.8 - $4.4 = $0.4 trilion

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Rahul Sunny answered 2 years ago

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