1. Now suppose in a country, Its GDP equals $15 billion. Consumption equals $9 b

Question

1. Now suppose in a country, Its GDP equals $15 billion. Consumption equals $9 billion. Government purchases equal $1.5 billion. Tax revenue equal $1 billion. Let’s assume that we’re in a closed economy, and find investment, national saving, private saving, and public saving. (Tip: Y = C + I + G) a. The value of Investment (I) is: 4.5 Billion b. How much is the National Saving (S)? c. How much is the private saving? 5 Billion d. How much is the public saving? .5 Billion

2. Use a diagram of the loanable funds market to illustrate the effect of the following events on the equilibrium interest rate and investment spending. a. An economy is opened to international movements of capital, and a net capital inflow occurs. b. Retired people generally save less than working people at any interest rate. The proportion of retired people in the population goes up

Explanation / Answer

(1) Y = C + I + G

(a)

I ($ billion) = Y - C - G = 15 - 9 - 1.5 = 4.5

(b)

National saving ($ billion) = Y - C + T - G = 15 - 9 + 1 - 1.5 = 5.5

(c)

Private saving ($ billion) = Y - C = 15 - 9 = 6

(d)

Public saving ($ billion) = T - G = 1 - 1.5 = -0.5

NOTE: As per Answering Policy, 1st question has been answered.

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