18.1 How Government Borrowing Affects Investment and the Trade Balance

Using the national savings and investment identity, if private investment equals $2750, inflow of foreign savings equals $3250, and the government budget deficit equals $2950, what does private savings equal?

$2450

The national saving and investment identity can be written as:

Private savings + Inflow of foreign savings = Private investment + Government budget deficit

So, in our case, we have X+$3250=$2750+$2950, where X= private investment. Hence, X=$2450.

Using the national savings and investment identity, if private investment equals $5550, inflow of foreign savings equals $6550, and the government budget deficit equals $2375, what does private savings equal?

$1375

The national saving and investment identity can be written as:

Private savings + Inflow of foreign savings = Private investment + Government budget deficit

So, in our case, we have X+$6550=$2375+$5550, where X= private investment. Hence, X=$1375.

Which of the following is true if the government runs budget surpluses?

Select the correct answer below:

the trade deficit increases

the government demands financial capital

the private savings increase

the government acts as a saver

the government acts as a saver

If the government runs budget surplus, it acts as a saver rather than a borrower, and supplies rather than demands financial capital. For example, in 1999 and 2000, the U.S. government had budget surpluses, although the economy was still experiencing trade deficits. When the government was running budget surpluses, it was acting as a saver rather than a borrower, and supplying rather than demanding financial capital.

Using the national saving and investment identity, if private savings equal $3200, private investment equals $7800, and the government budget deficit equals $3300, what does the inflow of foreign savings equal?

$7900

The national saving and investment identity can be written as:

Private savings + Inflow of foreign savings = Private investment + Government budget deficit

So, in our case, we have $3200+X=$7800+$3300, where X= inflow of foreign savings.

 

$3200+X=$7800+$3300$3200+X=$11100X=$7900

Using the national saving and investment identity, if private investment equals $87000, private savings equals $27000, and public savings equals $44000, what does the trade deficit equal?

The national saving and investment identity can be written as:

Private investment = Private savings + Public savings + Trade deficit

So, in our case, we have $87000=$27000+$44000+X, where X equals the trade deficit. Hence, X=$16000.

Which of the following statements about budget deficits and surpluses is true?

Select the correct answer below:

If the budget deficit falls, private savings also fall.

If the budget surplus increases, the trade deficit increases.

If the budget deficit falls, domestic private savings fall.

If the budget surplus rises, the trade surplus falls.

If the budget deficit falls, private savings also fall. 

We must accompany a change in any part of the national saving and investment identity by offsetting changes in at least one other part of the equation because we assume that the equality of quantity supplied and quantity demanded always holds. Therefore, if the budget deficit falls, domestic private investment rises, or private savings fall, or the trade deficit falls.