Suppose in an economy, household savings equal 4000, firm savings (undistributed profits) equal 800, the government...

Suppose in an economy, household savings equal 4000, firm savings (undistributed profits) equal 800, the government has a deficit of 2500, and investment is 3500.

What must the trade deficit be? What is the savings of the ROW?
Explain how the trade deficit and the government budget deficit are connected (‘twin deficits”). You can refer to the US as an example.

Expert Solution

Household savings = 4000, Firm savings = 800. This makes private saving = 4800.

Public saving = -2500

Thus national saving = 4800 - 2500 = 2300

Investment = 3500

1) Note that S - I = NX

Hence NX = 2300 - 3500 = -1200

Trade deficit is 1200

Savings of the ROW = 1200 (which is also the foreign investment)

2) It is explained below

Rahul Sunny answered 2 years ago

National savings in US is equal to 40 billion dollars. Suppose US is an open economy...

National savings in US is equal to 40 billion dollars. Suppose US is an open economy and the real interest rate on Canada bonds increases. All else equal, what would we expect to happen to US investment and net capital outflow? Select one: a. Net capital outflow decreases and US investment increases. b. Net capital outflow increases and US investment increases. c. Net capital outflow increases and US investment decreases. d. Net capital outflow decreases and US investment decreases.

Suppose that for a particular economy and period, investment was equal to 100, government expenditure was...

Suppose that for a particular economy and period, investment was equal to 100, government expenditure was equal to 75, net taxes were fixed at 100, and consumption (C) was given by the consumption function C = 25 + 0.8YD where YD is disposable income and Y is GDP. a. What is the level of equilibrium income (Y). b. What is the value of the government expenditure multiplier? Of the tax multiplier? c. Suppose that investment declined by 40 units to...

Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints.

Regulating a natural monopoly Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services and the company's marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves.Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints. Complete the first row of the following table. Suppose that the government forces the monopolist to set the price equal to marginal cost. Complete the second...

If the government wants to increase the amount of savings in the economy, how should it...

If the government wants to increase the amount of savings in the economy, how should it alter government spending? What effect will this action have on the interest rate in the economy? (Use the appropriate graph and model to illustrate the effect). Explain thoroughly.

An economy recently had 800 billion euros of savings and 600 billion euros of net capital...

An economy recently had 800 billion euros of savings and 600 billion euros of net capital outflow. What was its investment? What was the quantity of loanable funds supplied?

If the government wants to increase the amount of savings in the economy,how should it alter...

If the government wants to increase the amount of savings in the economy,how should it alter government spending?What effect will this action have on the interest rate in the economy?(Use the appropriate graph to help demonstrate the effect.)

Suppose that Imagineland is an open economy. Initially, the government balanced. Suppose the government runs a...

Suppose that Imagineland is an open economy. Initially, the government balanced. Suppose the government runs a budget surplus. a. Use the appropriate diagrams to determine the effects on the real interest funds market. b. In the foreign currency exchange market, show the effects of the budget the balance of trade.

What two things does a firm want to set equal if they want to maximize profits?...

What two things does a firm want to set equal if they want to maximize profits? Why? Which one acts as a demand curve for the firm and which one as a supply curve?

Suppose a firm in a perfectly competitive market is earning normal profits and there is an...

Suppose a firm in a perfectly competitive market is earning normal profits and there is an increase in demand. In the short run, the firm earns A. an economic profit as prices rise. In the long run, new firms will enter and prices will rise. B. an economic profit as prices fall. In the long run, new firms will enter and prices will rise. C. an economic profit as prices rise. In the long run, new firms will enter and...

Suppose the government decides to issue a new savings bond that is guaranteed to double in...

Suppose the government decides to issue a new savings bond that is guaranteed to double in value if you hold it for 16 years. Assume you purchase a bond that costs $75. a. What is the exact rate of return you would earn if you held the bond for 16 years until it doubled in value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If you purchased the...

Question