Answer to Question #220746 in Macroeconomics for jannat

Question

Consider the following problem. Suppose Govt. has reduced its purchase by 50 million USD. (Taxes = constant). If MPS = 0.7, what impact does this fiscal policy have on the followings? (Picture is not needed)

a)         Public Savings      b) Private savings          c) National savings    d) Investment

Answer 1

(a) Public savings - public savings will increase since the difference between government spending and government revenue will be positive.

(b) Private savings - private savings will reduce since there will be a lower or no budget deficit. Only higher budget deficits will be offset by greater private saving.

(c) National savings- national savings will increase due to increase in public savings in order to match a higher demand for loanable funds.

(d) Investment- a decrease in government purchases will result in a decline in demand for goods and services by a proportion equal to the decrease in government purchases. Given that disposable income and consumption remains constant, reduction in government purchases must be offset by a rise in investment. The demand for loanable funds will increase.