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Chapter 21: Problem 8

Consider the following data for a closed economy: $$ \begin{aligned} Y &=\$ 12 \text { trillion } \\ C &=\$ 8 \text { trillion } \\ G &=\$ 2 \text { trillion } \\ S_{\text {Public }} &=-\$ 0.5 \text { trillion } \\ T &=\$ 2 \text { trillion } \end{aligned} $$ Use these data to calculate the following: a. Private saving b. Investment spending c. Transfer payments d. The government budget deficit or budget surplus

Short Answer

Expert verified
a. Private saving is \$2 trillion, b. Investment spending is \$2 trillion, c. Transfer payments amount to \$0.5 trillion, d. There is a government budget deficit of \$0.5 trillion.

Step by step solution

01

Calculate Private Saving

In order to calculate private saving, we can use the following formula: \(S_{private} = Y - T - C\). Now we plug in the numbers: \(S_{private} = \$12 trillion - \$2 trillion - \$8 trillion = \$2 trillion\). Therefore, private saving is \$2 trillion.
02

Calculate Investment Spending

Investment spending can be calculated using the identity: \(I = Y - C - G\). By plugging in the numbers, we get: \(I = \$12 trillion - \$8 trillion - \$2 trillion = \$2 trillion\). Therefore, investment spending is \$2 trillion.
03

Calculate Transfer Payments

Transfer payments can be found using the equation: \(TR = G - T + S_{public}\). By plugging in the numbers, we get: \(TR = \$2 trillion - \$2 trillion - (-\$0.5 trillion) = \$0.5 trillion\). Therefore, transfer payments amount to \$0.5 trillion.
04

Calculate the Government Budget Deficit or Surplus

The government budget deficit or surplus can be calculated using the identity: \(Budget = T - G - TR\). Plugging in the numbers, we get: \(Budget = \$2 trillion - \$2 trillion - \$0.5 trillion = -\$0.5 trillion\). Since the result is negative, this represents a budget deficit of \$0.5 trillion.

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Most popular questions from this chapter

Robert Samuelson, a columnist for the Washington Post, argued that the Great Moderation actually caused the Great Recession. During the Great Moderation, he wrote, "consumers could assume more debt- and lenders could lend more freely." Why might consumers have been willing to assume more debt and banks and other lenders have been willing to make loans more freely during the Great Moderation? Why might these actions have made the severe recession of \(2007-2009\) more likely?

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