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10 September, 13:10

4. Consider the following information for a closed economy. Y = $12 trillion, C = $8 trillion, G = $2 trillion, Spublic = $-0.5 trillion and T = $2 trillion. 1. What is private savings for this economy? 2. What is investment spending for this economy? 3. What are the transfer payments for this economy? 4. Is there a government budget deficit or surplus for this economy? PreviousNext

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  1. 10 September, 14:01
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    a. Private savings = $2.5 trillion

    b. Investment = $2 trillion

    c. Transfer payment = $0.5 trillion

    d. The economy has a budget deficit of $0.5 trillion.

    Explanation:

    Y = $12 trillion

    C = $8 trillion

    G = $2 trillion

    Spublic = $-0.5 trillion

    T = $2 trillion

    (a) Private Savings = Y + TR - C - T., where Y is GDP, TR is Transfer Payment, C is consumption expenditure and T are taxes.

    Private savings = 12 + 0.5 - 8 - 2

    Private savings = $2.5 trillion.

    (b) Investment = Y - C - G

    = 12 - 8 - 2

    Investment = $2 trillion.

    (c) Solve for Transfer payment (TR) by rearranging public saving: T-G-TR = S (public).

    TR = T - G - S (public)

    = 2 - 2 - (-.5)

    = 0.5 trillion

    The transfer payment is 0.5 trillion dollar.

    (d) To know whether there's budget surplus or not, we find the budget balance = T - G - TR

    = 2 - 2 - 0.5

    = - 0.5 trillion.

    This shows that there's a budget deficit of 0.5 trillion dollar.
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