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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

A closed economy has income of $1,000, government spending of $200, taxes of $150, and investment of $250. What is private saving?

a. $100

b. $200

c. $300

d. $400

To determine

The Private savings of the economy.

Explanation

The savings is the revenue left after the spending. There are mainly three types of incomes, namely Private income, Government income and the National income. The personal income refers to the income of the individual or the consumer. When the personal income tax is paid from of the income of the individual, the remaining part is known as the private savings.

The government savings is the savings left with the government after the different spending of the government. The income of the government is the tax revenue collected by the government. The spending of the government includes different spending of the public programs. The remaining portion of the government income after the spending is known as the government savings. The national income on the other hand is the summation of the private savings and the government savings.

When the economy is closed economy, there will be no international trade relations to the economy with the world economy. Thus, the savings in the economy must be equal to its investments. This means that the savings investments equality exists in the economy which can be shown with the equation as follows:

Savings (S)=Investments (I) .

The savings of the economy is the part of the income left after the spending. Here there are two types of spending which are the consumption spending and the government spending. So, the equation can be rewritten as follows:

IncomeConsumptionGovernment spending=Investment

The private saving equal to the income are left behind after consumption and paying the income taxes to the government. Similarly, the government savings is the revenue left after spending of the government

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