Question 1

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 2

Use the following to answer questions :
Scenario: Open Economy S = I
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.
-(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much is private saving?

Accepted Answer

The answer of Use the following to answer questions :
Scenario:...

Question 3

National savings in a closed economy is all of the following EXCEPT:

Accepted Answer

Government spending minus consumption is not a correct representation of national savings in a closed economy. National savings is typically calculated as GDP minus consumption and government spending, which aligns with options A, B, and C.

Question 4

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

Accepted Answer

In a closed economy, there are no foreign savings available, and therefore all investment spending must come from national savings. Option A is incorrect because it only considers government spending, not private investment. Option C is incorrect because a closed economy does not have access to foreign savings. Option D is incorrect because it suggests all three options are necessary, but only national savings are required for investment spending in a closed economy.

Question 5

The savings-investment spending identity says that:

Accepted Answer

The savings-investment spending identity is an accounting identity that states that total savings in the economy must be equal to total investment spending. This is because every dollar that is saved ultimately goes towards funding someone else's investment. Therefore, the correct choice is B: savings and investment spending are always equal for the economy as a whole.

Question 6

In an open economy, total investment equals:

Accepted Answer

In an open economy, total investment is funded not only by national savings but also by capital inflow from foreign countries. Therefore, total investment equals national savings plus capital inflow.

Question 7

Use the following to answer questions :
Scenario: Open Economy S = I
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.
-(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. 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 8

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

Accepted Answer

In a closed economy, there are no international transactions (IM and NX are negligible). Therefore, the savings-investment spending identity simplifies to I = GDP - C - G. This equation states that investment (I) equals the difference between the total output of the economy (GDP) and the sum of consumption (C) and government spending (G).

Question 9

To help increase investment spending, the government can:

Accepted Answer

Lowering taxes on the returns from savings will increase the incentive to save, leading to an increase in funds available for investment. This increase in supply of funds will decrease the interest rate, making investment projects more attractive and increasing investment spending. Lowering taxes on consumption (choice A) may also increase disposable income, but it may not necessarily lead to increased investment spending. Raising taxes on bonds (choice C) and lowering taxes on stock dividends may not have a significant impact on investment spending as it only affects the returns on specific financial instruments. Lowering taxes on investment spending while raising taxes on savings (choice D) may not be effective in increasing investment spending as it may not lead to a significant shift in behavior towards savings and investment.

Question 10

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 11

Use the following to answer questions :
Scenario: Open Economy S = I
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.
-(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much is the net capital inflow?

Accepted Answer

In an open economy with S = I, Net Capital Inflow (NCI) is given by
NCI = S – I + (T – G)
where S = investment, I = national saving, T = tax revenue, and G = government spending.

Here, S = I (given in the scenario).
Hence, NCI = (T – G)
Now, T = 0.5 trillion and G = 2 trillion
Therefore, NCI = 0.5 – 2 = –1.5 trillion

Since NCI is negative, it means there is a Net Capital Outflow (NCO).
The absolute value of NCO = 1.5 trillion.
Since NCO = (X – M) = (1 – 3) trillion = –2 trillion
Therefore, the Net Capital Inflow (NCI) = 2 trillion.

Question 12

The government saves when:

Accepted Answer

When tax revenue is more than government spending, the government is able to save the difference. This surplus can be used to pay off debt, invest in infrastructure, or other priorities.

Question 13

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 (S) can be calculated as S = Y - C - G, where Y is GDP. Therefore, private savings are $30 billion ($110 billion - $70 billion - $10 billion). Since taxes (T) were $20 billion, the government's budget balance (T - G) was a deficit of $10 billion. Net savings (S - I) are $20 billion (private savings of $30 billion minus investment spending of $10 billion). Therefore, the correct answer is choice D.

Question 14

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

Accepted Answer

The savings-investment spending identity states that for the economy as a whole, savings must equal investment spending. This is because every  dollar saved by one person or entity must be matched by a dollar invested by another person or entity. The identity does not depend on government savings, trade surpluses/deficits, or government budget deficits/surpluses.

Question 15

Use the following to answer questions :
Scenario: Open Economy S = I
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.
-(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much is national saving?

Accepted Answer

The answer of Use the following to answer questions :
Scenario:...

Question 16

The government saves when it:

Accepted Answer

The government saves when it has a budget surplus. A budget surplus means that the government’s revenue exceeds its expenditure, thus allowing it to save the excess funds. A balanced budget means that the revenue and expenditure are equal, so there is no surplus or savings. A budget deficit means that the government spends more than its revenue, and it has to borrow to cover the shortfall, so it does not save. Borrowing by selling bonds also means that the government has to pay interest on the bonds, so it does not save, unless it invests the borrowed funds in projects that generate more revenue than the cost of the borrowed funds.

Question 17

In a closed economy, national savings equals private savings:

Accepted Answer

National savings (S) is equal to private savings (Sp) plus the budget balance (B), plus net foreign investment (NFI). In a closed economy, NFI is zero. Therefore, S = Sp + B. Since private savings is not directly affected by consumption or investment spending, option A and C are not correct. Tax receipts may affect the budget balance, but not private savings, so option D is not correct. Option B is correct because national savings equals private savings plus the budget balance.

Question 18

According to the savings-investment spending identity:

Accepted Answer

The savings-investment spending identity states that total savings in an economy equals total investment spending. Therefore, option A - savings equals investment spending - is the correct answer. Options B and C are incorrect as they do not accurately reflect the savings-investment spending identity, and option D is partially correct as it includes consumption spending but does not accurately reflect the relationship between savings and investment spending.

Question 19

In a closed economy, national savings equals:

Accepted Answer

National savings equals disposable income minus consumption spending plus government savings (tax receipts minus government spending). This is because the net savings of private households (disposable income minus consumption) are combined with the net savings of the government sector (tax receipts minus government spending) to determine the total national savings.

Question 20

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.

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