Consider the following data for a closed economy: Y $12 trillion C $8 trillion $

Question

Consider the following data for a closed economy: Y $12 trillion C $8 trillion $2 trillion G public S-0.50 trillion T $2 trillion Now suppose that government purchases increase from $2 trillion to $2.75 trillion but the values of Y and C are unchanged. What must happen to the values of S and 1? O A. O B. . O D. S and I drop by $0.75 trillion S drops by $0.75 trillion and I increases by $0.75 trillion. s increases by $0.75 trillion and l drops by $0.75 trillion. S and I increase by $0.75 trillion.

Explanation / Answer

Correct option is (B).

National saving (S) = Private saving + Public saving = (Y - C) + SPublic

I = Y - C - G [Since Y = C + I + G]

When G increases by $(2.75 - 2) = $0.75 trillion, SPublic (= T - G) decreases by $0.75 trillion. Y and C remaining unchanged, S decreases by $0.75 trillion and I increases by $0.75 trillion.

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