Question 1

To help increase investment spending, the government can:

Accepted Answer

By lowering taxes on the returns from savings, total savings increase and the interest rate falls. This makes borrowing cheaper and increases investment spending.

Question 2

In an open economy, total investment equals:

Accepted Answer

In an open economy, investment can be financed by domestic savings and/or capital inflows from abroad. Therefore, total investment equals national savings plus capital inflow.

Question 3

In a closed economy, investment spending, I, must equal:

Accepted Answer

In a closed economy (which means no trade with the outside world), investment spending equals GDP minus consumption (C) and government spending (G). This is because in the identity GDP = C + I + G (for a closed economy, where there is no net exports, X - M), rearranging for I gives I = GDP - C - G.

Question 4

In a closed economy, all investment spending must come from:

Accepted Answer

In a closed economy, there are no foreign savings available, so all investment spending must come from national savings. These savings can come from households, businesses, and the government.

Question 5

The savings-investment spending identity says that:

Accepted Answer

The savings-investment spending identity is an accounting identity that states that savings and investment spending are always equal for the economy as a whole. This means that total savings in the economy must be equal to total investment spending in the economy, because every dollar saved by one person must be invested by someone else, either elsewhere in the economy or abroad. Therefore, option B is the correct answer. The other options are incorrect because they do not accurately describe the savings-investment spending identity.

Question 6

One difference between a closed and an open economy is that:

Accepted Answer

In an open economy, foreign savings can complement domestic savings in financing investment spending, allowing for more resources to be available for investment than would be possible with domestic savings alone. This is not the case in a closed economy, where investment can only be financed through domestic savings.

Question 7

In a closed economy, the savings-investment spending identity is:

Accepted Answer

In a closed economy, there is no international trade, so the terms related to net exports (IM and NX) are zero. Therefore, the savings-investment identity simplifies to I = GDP - C - G.

Question 8

In a closed economy, national savings equals:

Accepted Answer

National savings is equal to the amount of income that is not spent on consumption or taxes, which is (disposable income minus consumption spending) plus (tax receipts minus government spending).

Question 9

In an open economy, GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. How much is private saving?

Accepted Answer

The answer of In an open economy, GDP is $12...

Question 10

National savings is the sum of private savings and:

Accepted Answer

National savings is the sum of private savings and the budget balance, which is the difference between government revenues (mainly taxes) and government spending.

Question 11

The government saves when tax revenue:

Accepted Answer

The government saves when its tax revenue exceeds its spending, meaning it has a surplus. This is because saving, in a governmental context, refers to the excess of income over expenditure.

Question 12

According to the savings-investment spending identity:

Accepted Answer

The savings-investment spending identity states that savings and investment spending are equal.

Question 13

In an open economy, GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. How much is national saving?

Accepted Answer

The answer of In an open economy, GDP is $12...

Question 14

In an open economy, GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. How much is the net capital inflow?

Accepted Answer

Net capital inflow = exports - imports
Net capital inflow = $1 trillion - $3 trillion
Net capital inflow = -$2 trillion (negative sign indicates a net capital outflow) 
Therefore, the correct choice is B ($2 trillion).

Question 15

The government saves when it:

Accepted Answer

When the government has a budget surplus, it means that it is collecting more revenue through taxes and other sources than it is spending on programs and services. This allows the government to save money that can be used for future projects or to pay down debt. A balanced budget, by definition, means that spending and revenue are equal, so there is no surplus to save. A budget deficit means that the government is spending more than it is taking in, resulting in increased debt. Borrowing by selling bonds may provide temporary funding for the government, but it also increases the overall debt and interest payments.

Question 16

In a closed economy government spending was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $110 billion this year. Investment spending was $10 billion. As a result:

Accepted Answer

Private savings is equal to disposable income minus consumption, or (GDP - taxes) - consumption. In this case, private savings would be ($110 billion - $20 billion) - $70 billion = $20 billion. The government's budget balance would be government spending minus taxes, or $30 billion - $20 billion = $10 billion, but the question is asking specifically about private savings.

Question 17

The savings-investment spending identity says that savings and investment spending are:

Accepted Answer

The savings-investment spending identity states that savings and investment spending in an economy are always equal for the economy as a whole, regardless of government budget deficits or surpluses or trade surpluses or deficits. This is because every dollar saved by one economic unit (such as a household, business, or government) is ultimately invested by another economic unit, leading to a continuous circular flow of funds throughout the economy.

Question 18

National savings in a closed economy is NOT:

Accepted Answer

National savings in a closed economy is equal to the difference between national income and national spending, which is (Y - C - G). Therefore, choice D (government spending minus consumption) is not correct. Instead, choice C (GDP - C - G) is the correct formula for national savings in a closed economy. Choices A and B are also correct.

Question 19

In an open economy, GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. What is the government budget balance?

Accepted Answer

The government budget balance is calculated as taxes minus government spending. Here, taxes are $0.5 trillion and government spending is $2 trillion, resulting in a deficit of $1.5 trillion.

Question 20

In a closed economy, national savings equals private savings:

Accepted Answer

National savings is equal to private savings plus the budget balance. This is because the budget balance, which is the difference between government tax revenue and expenditures, is a component of national savings. Private savings, which is the sum of household and business savings, is also a component of national savings. Consumption spending and investment spending are not directly related to national savings, while tax receipts are only one component of government revenue and not the entirety of the budget balance. Therefore, (B) is the correct choice.

Quiz 10: Savings, Investment Spending, and the Financial Syst