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Chapter 25: Problem 2

Given the following information about the open economy of Regalia, what is the level of investment spending and private savings, and what are the budget balance and net capital inflow? What is the relationship among the four? There are no government transfers. (Hint: net capital inflow equals the value of imports (IM) minus the value of exports \((X) .)\) GDP \(=\$ 1,000\) million \(\quad G=\$ 100\) million \(C=\$ 850\) million \(\quad X=\$ 100\) million \(T=\$ 50\) million \(I M=\$ 125\) million

Short Answer

Expert verified
Answer: In the open economy of Regalia, the level of investment spending (I) is $75 million, private savings (S) is $100 million, budget balance is -$50 million, and net capital inflow is $25 million.

Step by step solution

01

Find Investment (I)

To find the level of investment spending, we will use the first equation: GDP = C + I + G + (X - IM). Plugging in the given values, we get: \(1,000 = 850 + I + 100 + (100 - 125)\) This simplifies to: \(I = 1,000 - 850 - 100 - (-25) = 75\)
02

Find Private Savings (S)

To find private savings, we will use the second equation: S = Y (GDP) - C - T. Plugging in the given values, we get: \(S = 1,000 - 850 - 50 = 100\)
03

Find Budget Balance

To find the budget balance, we will use the third equation: Budget Balance = T - G. Plugging in the given values, we get: Budget Balance \(= 50 - 100 = -50\)
04

Find Net Capital Inflow

To find the net capital inflow, we will use the fourth equation: Net Capital Inflow = IM - X. Plugging in the given values, we get: Net Capital Inflow \(= 125 - 100 = 25\) To summarize: - Investment spending (I) = $75 million - Private savings (S) = $100 million - Budget balance = $-50 million - Net capital inflow = $25 million The relationship among these four variables can be derived from the national income identity for an open economy: \(S - I = (T - G) + (IM - X)\) Plugging in the obtained values, we get: \(100 - 75 = (-50) + 25\) \(25 = 25\) This verifies the relationship among private savings, investment spending, budget balance, and net capital inflow in the economy of Regalia.

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Most popular questions from this chapter

In \(2014,\) Congress estimated that the cost of increasing support and expanding pre-kindergarten education and infant and toddler childcare would cost \(\$ 28\) billion. Since the U.S. government was running a budget deficit at the time, assume that the new pre-K funding was financed by government borrowing, which increases the demand for loanable funds without affecting supply. This question considers the likely effect of this government expenditure on the interest rate. a. Draw typical demand \(\left(D_{1}\right)\) and supply \(\left(S_{1}\right)\) curves for loanable funds without the cost of the expanded pre-K programs accounted for. Label the vertical axis "Interest rate" and the horizontal axis "Quantity of loanable funds." Label the equilibrium point \(\left(E_{1}\right)\) and the equilibrium interest rate \(\left(r_{1}\right)\). b. Now draw a new diagram with the cost of the expanded pre-K programs included in the analysis. Shift the demand curve in the appropriate direction. Label the new equilibrium point \(\left(E_{2}\right)\) and the new equilibrium interest rate \(\left(r_{2}\right)\) c. How does the equilibrium interest rate change in response to government expenditure on the expanded pre-K programs? Explain.

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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
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