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1. Saving and investment in the national income accounts The following table contains data for a hypothetical closed economy that uses the dollar as its currency. Suppose GDP in this country is $900 million. Enter the amount for government purchases. National Income Account Value (Millions of dollars) Government Purchases ( G ) 250 Taxes minus Transfer Payments ( T ) 325 Consumption ( C ) 375 Investment ( I ) 275 Points: 1 / 1 Close Explanation Explanation: A closed economy does not trade with the rest of the world, and, thus, its net exports are zero. Therefore, in this case, GDP is the sum of consumption, investment, and government purchases. To find the missing value of government purchases, the national income accounting identity can be rearranged as follows: C+I+G + � � + = = Y G = = Y−I−C � � � = = $900 million−$275 million−$375 million $900 million−$275 million− $375 million = = $250 million $250 million Complete the following table by using national income accounting identities to calculate national saving. In your calculations, use data from the preceding table. National Saving (S) National Savin g ( ) = = Error! Filename not specified. Y - C - G Y - C - G = = Error! Filename not specified. I $275
million Points: 1 / 1 Close Explanation Explanation: National saving is the total income in the economy that is left over after paying for consumption and government purchases. In a closed economy, subtracting consumption and government purchases from GDP also yields investment spending, so national saving equals investment: National Saving (S) National Savin g ( ) = = Y−C−G � � � = = I = = $275 million $275 mill ion Complete the following table by using national income accounting identities to calculate private and public saving. In your calculations, use data from the initial table. Private Saving Private Sa ving = = Error! Filename not specified. Y - C - T Y - C - T = = $275 $200 million Points: 0.5 / 1 Public Saving Public Sav ing = = Error! Filename not specified. T - G T - G = = $75 million Points: 1 / 1 Close Explanation Explanation: Private saving is the income that remains after households pay taxes and make consumption expenditures: Private Saving Private Sa ving = = Y−C−T � � � = $200 million $200 mill
= ion Public saving is the amount of tax revenue that the government has left over after paying for its spending: Public Saving Public Sav ing = = T−G � � = = $75 million $75 mill ion Based on your calculations, the government is running a budget Error! Filename not specified. surplus . Points: 1 / 1 Close Explanation Explanation: When a government spends less than it collects in tax revenues, it runs a government budget surplus . Public saving is positive in the case of a budget surplus. Note that national saving can be thought of as the sum of private and public saving. To verify the national saving figure you derived, add private and public saving: National Saving National Sa ving = = Private Saving+Public Saving Private Saving+Public Saving = = (Y−C−T)+(T−G) + � � � � � = = $200 million+$75 million $200 million+$75 million = = $275 million $275 million 2. The meaning of saving and investment Classify each of the following scenarios listed in the table below using the macroeconomic definitions of saving and investment. Saving Investment Eileen buys a new crane for her construction firm.
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