Question

In an open economy, where consumption depends only on disposable income and national saving is 300. Investment =400-20r and world interest is 10 per cent. If govt spending increases by 100, does investment change. Why

Answer 1

Solution:

If government spending increases by 100, the investment will change. This is because government spending reduces savings in the economy, thus increasing interest rates resulting in less investment.

Investment = Private savings + public savings