a Assume that Y 5000 DI 4100 BD 200 C 3800 and NX 100 wh

(a) Assume that Y = 5,000, DI = 4,100, BD = 200, C =3,800 and NX = -100, where Y is GDP, DI is disposable income, BD is government’s budget deficit, C is consumption spending and NX is next exports. Find the values for saving (S), investment (I) and government spending (G) in this economy.

(b) If a country has a trade deficit, its government must necessarily have a budget deficit. True or false? Explain.

Solution

A) we knoe savings=Pvt +public savings=Yd-C+Taxes-G=300-200=100

Govt. Exenditure-taxes=budget deficit=200+900=1100

And we know Y=C+I+G+NX

5000=3800+I+100-100

I=1200

B) No, trade deficit=export-import

And budget deficit=G-taxes.

Given statement is false