Consider a small open economy with desired national saving of Sd = 200 + 10,000rw and desired investment of Id = 1,000 - 5,000rw.If rw = 0.05,and output = 5,000,then absorption equals
A)5,100.
B)5,050.
C)4,950.
D)4,900.

Question

Quizplus · Accepted Answer

First, we need to calculate the actual national saving and investment:

National saving = Sd = 200 + 10,000rw = 200 + 10,000(0.05) = 700
Investment = Id = 1,000 - 5,000rw = 1,000 - 5,000(0.05) = 750

Since national saving is less than investment, this economy has a saving-investment gap of:

Saving-investment gap = Id - Sd = 750 - 700 = 50

Therefore, absorption in this economy is equal to:

Absorption = output + saving-investment gap = 5,000 + 50 = 5,050

Hence, the answer is B.

Consider a Small Open Economy with Desired National Saving of Sd