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Chapter 25: Problem 1

Given the following information about the closed economy of Brittania, what is the level of investment spending and private savings, and what is the budget balance? What is the relationship among the three? Is national savings equal to investment spending? There are no government transfers. $\mathrm{GDP}=\$ 1,000\( million \)\quad T=\$ 50\( million \)C=\$ 850\( million \)\quad G=\$ 100$ million

Short Answer

Expert verified
Answer: Yes, in the closed economy of Brittania, national savings is equal to investment spending. The levels of investment spending (I), private savings (PS), and budget balance are as follows: - Investment Spending (I): \(50\) million - Private Savings (PS): \(100\) million - Budget Balance: \(-50\) million

Step by step solution

01

Identify the given variables

The problem provides us with the following values: - GDP = \(1,000\) million - Taxes (T) = \(50\) million - Consumption (C) = \(850\) million - Government spending (G) = \(100\) million
02

Calculate the level of investment spending (I)

Using the formula for GDP, we can find the level of investment spending. GDP = C + I + G \(1000 = 850 + I + 100\) Now, solve for I: I = \(1000 - 850 - 100\) I = \(50\) million
03

Calculate the private savings (PS)

Using the formula for private savings, we can find the level of private savings. PS = Y - T - C Where Y is GDP, PS = \(1000 - 50 - 850\) PS = \(100\) million
04

Calculate the budget balance

Using the formula for budget balance, we can find the level of budget balance. Budget Balance = T - G Budget Balance = \(50 - 100\) Budget Balance = \(-50\) million
05

Calculate the relationship among I, PS, and Budget Balance

In this step, we will analyze if national savings is equal to the investment spending. National Savings (NS) can be represented as the sum of private savings (PS) and budget balance. Using the National savings formula: NS = PS + Budget Balance NS = \(100 + (-50)\) NS = \(50\) million Since NS = \(50\) million and I = \(50\) million, we can conclude that national savings is equal to investment spending in this closed economy of Brittania.

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Most popular questions from this chapter

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