Consider the following data for a closed economy: Y = $12 trillion C = $8 trillion G = $2 trillion Spublic = $negative 0.50 trillion T = $2 trillion Now suppose that government purchases increase from $2 trillion to $2.50 trillion but the values of Y and C are unchanged. What must happen to the values of S and I? A. S and I increase by $0.50 trillion. B. S and I drop by $0.50 trillion. Your answer is correct. C. S drops by $0.50 trillion and I increases by $0.50 trillion. D. S increases by $0.50 trillion and I drops by $0.50 trillion.

Question

Baby Cakes

Business

3 February, 10:36

Consider the following data for a closed economy: Y = $12 trillion C = $8 trillion G = $2 trillion Spublic = $negative 0.50 trillion T = $2 trillion Now suppose that government purchases increase from $2 trillion to $2.50 trillion but the values of Y and C are unchanged. What must happen to the values of S and I? A. S and I increase by $0.50 trillion. B. S and I drop by $0.50 trillion. Your answer is correct. C. S drops by $0.50 trillion and I increases by $0.50 trillion. D. S increases by $0.50 trillion and I drops by $0.50 trillion.

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Answers (1)

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Kaiser · Answer 1

B. S and I drop by $0.50 trillion.

Explanation:

In a closed economy we got the following identity

Y = C + I + G

The income is equal to the amount consumed, the amount invested and the goverment spending

12 = 8 + I + 2

I = 2

The investment is equal to the savings of the economy in this case as government and taxes are equal, the public runs at equilibrium

While private sector:

Y - C - T = private savings

12 - 8 - 2 = 2 Private saving

If Government increase government spending by 0.50

The government will run into a deficit making savings decrease as will borrow from the private sector.

This makes the investment decrease as well as savings for the economy as a whole.