If the government has a $100 million budget deficit,private saving is equal to $500 million,private investment is equal to $300 million,what is the value of the current account in equilibrium?
A)$100 million surplus
B)$700 million surplus
C)$100 million deficit
D)$700 million deficit

Question

Quizplus · Accepted Answer

In an open economy, the national income identity is given by Y = C + I + G + (X - M), where Y is national income, C is consumption, I is investment, G is government spending, and (X - M) is net exports or the current account balance. The savings-investment balance approach can also represent this, where national saving (S) equals private saving plus government saving (which is negative in the case of a deficit), and this total saving equals investment plus the current account balance. Here, private saving is $500 million, government saving is -$100 million (due to the deficit), so total saving is $400 million. Since private investment is $300 million, the difference, which must equal the current account balance, is $100 million. Therefore, there is a $100 million current account surplus.

If the Government Has a $100 Million Budget Deficit,private Saving