Question

4. Assume that GDP is $6000, personal disposable income is $5100, the gov’t deficit is $200, consumption is $3800 and the trade deficit is $100.

What is the size of:

a.      Private saving

b.      Investments

c.      Government spending

Answer 1

Savings is given by Government savings + private savings.

GS - Government savings

PS- private savings

DI- disposable income

C- consumption

S- savings

T- tax

a)

$S=GS+PS$

$PS=DI-C$

$=5,100-3,800$

$=\$1,300$

$GS=-\$200$

Hence;

$S=GS+PS$

$=-\$200+\$1,300$

$=\$1,100$

b)

Investment is calculated as follows;

$I=Y−C−G−NX,$

$I=\$6000−\$3800−\$1100−(−\$100)$

$=\$1,200.$

c)

Government spending is calculated by;

As stated in the question, the government budget is a deficit

$T−G=−\$200.$

$T=GDP−DI=\$6000−\$5100$

$=\$900.$

$G=T+\$200=\$900+\$200=\$1,100.$