4. Consider the following information for a closed economy. Y = $12 trillion, C = $8 trillion, G = $2 trillion, Spublic = $-0.5 trillion and T = $2 trillion. 1. What is private savings for this economy? 2. What is investment spending for this economy? 3. What are the transfer payments for this economy? 4. Is there a government budget deficit or surplus for this economy? PreviousNext

a. Private savings = $2.5 trillion

b. Investment = $2 trillion

c. Transfer payment = $0.5 trillion

d. The economy has a budget deficit of $0.5 trillion.

Explanation:

Y = $12 trillion

C = $8 trillion

G = $2 trillion

Spublic = $-0.5 trillion

T = $2 trillion

(a) Private Savings = Y + TR - C - T., where Y is GDP, TR is Transfer Payment, C is consumption expenditure and T are taxes.

Private savings = 12 + 0.5 - 8 - 2

Private savings = $2.5 trillion.

(b) Investment = Y - C - G

= 12 - 8 - 2

Investment = $2 trillion.

(c) Solve for Transfer payment (TR) by rearranging public saving: T-G-TR = S (public).

TR = T - G - S (public)

= 2 - 2 - (-.5)

= 0.5 trillion

The transfer payment is 0.5 trillion dollar.

(d) To know whether there's budget surplus or not, we find the budget balance = T - G - TR

= 2 - 2 - 0.5

= - 0.5 trillion.

This shows that there's a budget deficit of 0.5 trillion dollar.