Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 2,000. What value of government purchases would make national savings equal to 1,000 and at that value would the government have a deficit or surplus?
A)2,500, deficit
B)2,500, surplus
C)1,000, deficit
D)1,000, surplus

Question

Quizplus · Accepted Answer

National savings = GDP - consumption - taxes

1,000 = 11,000 - 7,500 - 2,000

Therefore, investment + government purchases = 1,000

Let's assume investment is fixed at 1,500. Then, government purchases would need to be:

1,000 - 1,500 = -500

This means that the government would have a deficit of 500. Therefore, the only option that meets the criteria of national savings being 1,000 and the government having a deficit is option A, where government purchases is 2,500.

Suppose That in a Closed Economy GDP Is 11,000, Consumption