Question

The budget function for the economy of sunsville is t - g = -400 0.25y.

a) suppose income is $4,000. what is the value of the budget surplus or deficit?
b) what range of income will give sunsville a budget surplus?
c) what range of income will give sunsville a budget deficit?
d) at what level of income will there be a balanced budget?

Answer 1

The national saving and investment identity for this economy indicates that the balance of trade is zero. If the budget surplus changes to a deficit of $1,000, the new balance of trade will be $2,000.

Step-by-step explanation:

a. National Saving and Investment Identity:

The national saving and investment identity for this economy can be written as: Private Savings + Government Budget Balance + Balance of Trade = Investment

Given:

• Private Savings = $4,000
• Government Budget Balance (Budget Surplus) = $1,000
• Investment = $5,000

Plug in the values into the identity:

$4,000 + $1,000 + Balance of Trade = $5,000

Simplifying the equation,

Balance of Trade = $0

b. Balance of Trade:

The balance of trade in this economy is $0.

c. New Balance of Trade:

If the budget surplus changes to a budget deficit of $1,000, with private saving and investment unchanged, the new national saving and investment identity would be:

$4,000 + (-$1,000) + New Balance of Trade = $5,000

Simplifying the equation,

New Balance of Trade = $2,000