Saving and Investment

Question 1 Assume the economy is open to imports and exports X = $125 million IM = $80 million Budget balance = -$200 million I = $350 million Determine private saving

Question 1 Private saving = $595 million

Question 2 X = $85 million IM = $135 million Budget balance = $100 million Private saving = $250 million Determine I

Question 2 I = $400 million

Question 3 X = $60 million IM = $95 million Private saving = $325 million I = $300 million Budget balance = ?

Question 3 Budget balance = -$60 million

Question 4 Private saving = $325 million I = $400 million Budget balance = $10 million Determine IM - X

Question 4 IM – X = $65 million

Question 5 In the loanable funds market, explain what happens to the interest rate, private saving, and investment spending when the following events occur: A) The government reduces the size of the budget deficit.

Question 5 B) Households decide to save more given the interest rate

Question 5 C) Businesses become much more optimistic about the profitability of investment spending.

Question 5 D) The nation’s trade deficit increases.

Question 5 E) The increase in the trade deficit is the same as the increase in the budget deficit.