Using the saving and investment identities from the national Income Accounts to answer the following questions. Suppose the following values are from the national income accounts of a country with a closed economy. Y=$900 billion T= $200billion C=$500 billion G=$230 billion. a)What is the value of private saving and what is the value of public saving? b) What is the value of investment? c) Explain the impact of the government's budget on economic growth. d) What is the value of aggregate demand in such and economy. Graphically illistrate where the equilibrium level of output is use a graph
a) To find the value of private saving, we use the saving identity, which states that saving (S) is equal to disposable income (YD) minus consumption (C). In this case, YD is equal to income (Y) minus taxes (T). Therefore, private saving (S) can be calculated as:
S = YD - C
= (Y - T) - C
= $900 billion - $200 billion - $500 billion
= $200 billion
To find the value of public saving, we use the saving identity, which states that public saving (S_pub) is equal to government revenue (T) minus government spending (G):
S_pub = T - G
= $200 billion - $230 billion
= -$30 billion
b) Investment (I) can be calculated using the investment identity, which states that investment is equal to saving:
I = S + S_pub
= $200 billion + (-$30 billion)
= $170 billion
c) The government's budget, reflected in the values of government spending and revenue, has an impact on economic growth. If government spending (G) exceeds government revenue (T), it results in a budget deficit. In this case, the value of public saving (S_pub) is negative (-$30 billion), indicating a budget deficit.
A budget deficit implies that the government is borrowing to finance its spending. When the government borrows, it effectively reduces the amount of saving available for private investment. This reduction in saving can lead to higher interest rates, making borrowing more expensive for businesses and households, thereby potentially discouraging private investment.
On the other hand, if there were a budget surplus (T > G), it would indicate that the government is saving more than it is spending. This surplus could potentially free up more saving for private investment, leading to lower interest rates and encouraging economic growth.
d) Aggregate demand (AD) is the total amount of goods and services demanded in an economy at a given level of prices. It can be calculated by summing up consumption (C), investment (I), government spending (G), and net exports (NX):
AD = C + I + G + NX
Since this is a closed economy (no net exports), the formula becomes:
AD = C + I + G
Using the given values, we can find the value of aggregate demand:
AD = $500 billion (C) + $170 billion (I) + $230 billion (G)
= $900 billion
Graphically, we can represent the equilibrium level of output by plotting aggregate demand (AD) against output (Y). The point where the AD curve intersects the 45-degree line, representing output, is the equilibrium level of output.