Question 1

Which of the following equations represents GDP for an open economy?

Accepted Answer

GDP for an open economy includes net exports (NX), represented in the equation as Y = C + I + G + NX. Option B only represents the net exports component, while option C subtracts consumption (C) and adds net exports (NX) to derive investment (I). Option D does not include net exports.

Question 2

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?

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.

Question 3

The purchase of a new house is the one form of

Accepted Answer

The purchase of a new house is considered investment rather than consumption because it is expected to generate income in the future when the house is sold or rented out. This type of investment is financed by private saving and contributes to GDP.

Question 4

The identity that shows that total income and total expenditure are equal is

Accepted Answer

The identity that shows that total income (Y: national income) and total expenditure (C + I + G + NX: national expenditure) are equal is represented by Y = C + I + G + NX. This identity is known as the national income accounting identity or the expenditure method of calculating GDP. Therefore, option D is the correct answer. Option A is incorrect because it only represents the value of GDP and not the relation between income and expenditure. Option B represents the income approach of calculating GDP, where Y is broken down into disposable income (DI), taxes collected by the government (T), and net exports (NX), which is not the same as the identity that shows income and expenditure are equal. Option C represents the relationship between GDP and GNP along with the net exports (NX), which does not explain the identity that shows income and expenditure are equal.

Question 5

Y = C + I + G + NX is an identity because

Accepted Answer

The answer of Y = C + I + G...

Question 6

In a small closed economy investment is $20 billion and private saving is $22 billion.What are public saving and national saving?

Accepted Answer

The answer of In a small closed economy investment is...

Question 7

Which of the following expressions must be equal to national saving for a closed economy?

Accepted Answer

National saving for a closed economy is equal to its investment. In the expression Y - C - G, Y represents total income, C represents consumption expenditure and G represents government expenditure. Therefore, Y - C - G represents the total income that is not consumed or spent by the government. This is the amount that can be saved or invested, hence Y - C - G must be equal to national saving.

Question 8

Which of the following equations represents GDP for a closed economy?

Accepted Answer

GDP for a closed economy is represented by the equation Y = C + I + G, where Y is GDP, C is consumption, I is investment, and G is government spending. This equation does not include net exports (NX) because the economy is closed and does not engage in international trade. Therefore, option D is the correct answer.

Question 9

In a closed economy,national saving equals

Accepted Answer

All of the options are correct. 
- Option A: Investment is equal to national saving in a closed economy because there are no foreign transactions, so any saving in the economy will be used to fund domestic investment. 
- Option B: National saving can be calculated as the difference between national income and national expenditure. Consumption and government purchases are components of national expenditure. Hence, saving equals income minus the sum of consumption and government purchases. 
- Option C: National saving consists of both private saving (saving by households and firms) and public saving (government saving). Hence, national saving can be expressed as the sum of private and public saving.

Question 10

Suppose that in a closed economy GDP is equal to 11,000,taxes are equal to 2,500,consumption equals 7,000,and government purchases equal 3,000.What are private saving and public saving?

Accepted Answer

The answer of Suppose that in a closed economy GDP...

Question 11

Which of the following equations will always represent GDP in an open economy?

Accepted Answer

In an open economy, not only domestic consumption, investment, and government spending contribute to GDP but also net exports. Therefore, the equation that represents GDP in an open economy should include net exports. Option D includes net exports (NX) and thus is the correct choice. Options A, B, and C do not include net exports and do not represent GDP in an open economy.

Question 12

Suppose that in a closed economy GDP is equal to 11,000,taxes are equal to 2,500 consumption equals 7,500 and government purchases equal 2,000.What are private saving,public saving,and national saving?

Accepted Answer

The answer of Suppose that in a closed economy GDP...

Question 13

According to the definitions of private and public saving,if Y,C,and G remained the same,an increase in taxes would

Accepted Answer

An increase in taxes would decrease disposable income and, therefore, decrease consumption (C) and decrease private saving (S). At the same time, the increase in taxes would increase government revenue and, if there is no change in government spending (G), the government budget surplus and public saving (Sgovt) would increase. Therefore, private saving would decrease and public saving would increase, resulting in a lower private saving and higher public saving.

Question 14

Which of the following lists correctly identifies the four expenditure categories of GDP?

Accepted Answer

The four expenditure categories of GDP are consumption, government purchases, investment, and net-exports. Option A correctly identifies these categories, while options B, C, and D include incorrect categories or exclude important ones.

Question 15

According to the definitions of national saving and private saving,if Y,C,and G remained the same,an increase in taxes would

Accepted Answer

An increase in taxes would reduce disposable income, leading to a decrease in private saving. National saving includes private saving, so if private saving decreases, national saving would also decrease. Therefore, the correct answer is D, which states that national saving would be unchanged and private saving would decrease.

Question 16

Consider the expressions T - G and Y - T - C.Which of the following statements is correct?

Accepted Answer

T - G represents government saving or public saving, since it is the difference between tax revenue (T) and government spending (G). 
Y - T - C represents private saving, since it is the difference between disposable income (Y - T) and consumption spending (C). Therefore, the first expression is public saving (or government saving) and the second expression is private saving.

Question 17

According to the definitions of national saving and public saving,if Y,C,and G remained the same,an increase in taxes would

Accepted Answer

An increase in taxes, while holding Y, C, and G constant, would reduce private saving and increase public saving. National saving, which is the sum of private saving and public saving, would remain unchanged. Therefore, the correct choice is D, which states that national saving would not change, but public saving would increase.

Question 18

In a closed economy,national saving is

Accepted Answer

In a closed economy, national saving (S) must equal investment (I) because there are no international flows of capital. This is known as the national income identity: Y = C + I + G, where Y is national income, C is consumption, G is government spending, and (Y - C - G) is national saving (S). In a closed economy, S only has one destination: investment. Therefore, S = I.

Question 19

Suppose that in a closed economy GDP is equal to 11,000,taxes are equal to 1,500,consumption equals 7,500,and government purchases equal 2,000.What is national saving?

Accepted Answer

National saving is the difference between income and expenditures. In this case, income is equal to GDP (11,000), and expenditures are consumption (7,500) and government purchases (2,000). Therefore, national saving is 11,000 - 7,500 - 2,000 = 1,500.

Question 20

Suppose a closed economy had public saving of $3 trillion and private saving of $2 trillion.What are national saving and investment for this country?

Accepted Answer

In a closed economy, national saving is the sum of public and private saving. Therefore, national saving is $3 trillion + $2 trillion = $5 trillion. In a closed economy, national saving equals investment, so investment is also $5 trillion.

Quiz 26: Saving, investment, and the Financial System