Suppose that GDP is equal to 1,000, national saving is equal to 200, the current account deficit is equal to 100, and the government budget deficit is equal to 50. Private savings must equal
A) 150.
B) 200.
C) 250.
D) 300.
E) 350.

Question

Quizplus · Accepted Answer

The equation for GDP is: 
GDP = C + I + G + X – M 
where C is consumption, I is investment, G is government spending, X is exports, and M is imports.

Rearranging the equation, 
(Savings) = I + (X - M) + (T - G) 
where T is taxes and (T - G) is the government budget surplus/deficit.

Using the information given: 
GDP = 1,000 
National saving = 200 
Current account deficit = 100 
Government budget deficit = 50

We can solve for private savings: 
200 (national saving) = I + (X - M) + (T - G) 
200 = I + (X - M) - 50 
250 = I + (X - M)

Since the current account deficit is 100, then (X - M) = -100. 
250 = I - 100 
I = 350

Therefore, private savings must be 250 to satisfy the given information.

Suppose That GDP Is Equal to 1,000, National Saving Is