Question three The national income grew by 5% in the fiscal year in which the go

Question

Question three The national income grew by 5% in the fiscal year in which the government was planning to increase foreign investment by 7.5% of Gross Domestic Product (GDP). GDP is calculated using the formula GDP=C+I_d+G (assume equivalent to national income) Consumption = K50, 000 (current year) Government spending K55, 000 (current year) Taxes were K75, 000 GDP was K100, 000 (previous year) Calculate national savings and current account balance (15 marks) Determine with reasons whether or not the economy will experience a budget deficit/surplus and BOP surplus/surplus (5marks)

Explanation / Answer

National savings = GDP -TAXES - CONSUMPTION + TAXES - GOVT. SPENDING

National savings = 100000-50000-75000+75000-55000 = 5000

Current account is zero because

current account = GDP-DOMESTIC DEMAND

Domestic demand = consumption+ Investments+govt.expenditure

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