The following equation is the national savings and investment identity for Cavel

Question

The following equation is the national savings and investment identity for Cavelandia (in billions of dollars): Category Private savings Inflow of Foreign Savings Private Investment Government Deficits Amount 175.0 175.0 50.0 300.0 What is the equilibrium quantity of financial capital for Cavelandia? Number Billion If currency depreciation causes a 100 billion drop in foreign savings inflows, what might also happen? O O O Any of these could happen An increase in private savings of a $100 billion A decrease in private savings of a $100 billion An increase in private investment of $100 billion

Explanation / Answer

Th supply of savings is private savings+inflow of foreign savings = 175+175 = 350billion dollars

The demand for capital = private investment + government deficit = 50+300 = 350 billion dollars.

Thus equilibrium quantity is where demand equal supply which is $350 billion

If currency depreciates and foreign saving drops: new supply of financial capital = 175+75 = 250 billion dollars. The correct option is (b) the private savings will increase the private saving by $100 billion

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