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Chapter 21: Problem 7

Consider the following data for a closed economy: $$ \begin{aligned} Y &=\$ 11 \text { trillion } \\ C &=\$ 8 \text { trillion } \\ I &=\$ 2 \text { trillion } \\ T R &=\$ 1 \text { trillion } \\ T &=\$ 3 \text { trillion } \end{aligned} $$ Use these data to calculate the following: a. Private saving b. Public saving c. Government purchases d. The government budget deficit or budget surplus

Short Answer

Expert verified
a. Private saving is \$1 trillion, b. Public saving is also \$1 trillion, c. Government purchases are \$1 trillion, d. There is a government budget surplus of \$1 trillion.

Step by step solution

01

Calculate Private Saving

Private saving is the difference between disposable income and consumption. Disposable income is essentially the gross domestic product (Y) minus taxes (T) plus transfer payments (TR). Given that Y = \$11 trillion, T = \$3 trillion, and TR = \$1 trillion, the disposable income is therefore \$11 trillion - \$3 trillion + \$1 trillion = \$9 trillion. With C given as \$8 trillion, the private saving is \$9 trillion - \$8 trillion = \$1 trillion.
02

Calculate Public Saving

Public saving is the difference between tax revenue and the sum of government purchases and transfer payments. As we don't know government purchases (G) yet, we will calculate it in the next step.
03

Calculate Government Purchases

To calculate government purchases, we use the fundamental equation of the economy: Y = C + I + G. Here, Y is 11 trillion, C is 8 trillion, and I is 2 trillion. Thus, G can be calculated as G = Y - C - I = \$11 trillion - \$8 trillion - \$2trillion = \$1 trillion.
04

Calculate Public Saving again

Now that we know G, we can plug it back into our equation for public saving. This means public saving = T - G - TR = \$3 trillion - \$1 trillion - \$1 trillion = \$1 trillion.
05

Determine the Government Budget Deficit or Surplus

The government has a budget surplus if public saving is positive, and a budget deficit if it is negative. Since our calculated public saving is \$1 trillion (which is a positive amount), there is a government budget surplus of \$1 trillion.

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Most popular questions from this chapter

From 2008 to 2009 , the total revenue Chevron earned from all of its operations declined by more than 50 percent, while its expenditures on oil exploration remained unchanged. If the firm was suffering from declining sales of gasoline and other products during the recession, why would it maintain its spending on exploring for additional oil?

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