Question

Suppose that, for country ABC, national savings (S) is 100 , national investment (I) is 100 , government spending (G) is 50 , the government revenue (T) is 50 .

(1) What will be the amount of trade surplus?
(2) If the government expands its spending without raising taxes (by borrowing from the public), what will happen to interest rates?
(3) If the government expands its spending without raising taxes (by borrowing from the public), what is likely to happen to national savings, national investment, and trade surplus?
(4) Would your answer to (2) and (3) be different if the government does not borrow from the public, but instead directly from the central bank?

Answer 1

Based on the given information, the trade surplus cannot be determined. If the government expands its spending without raising taxes by borrowing from the public, it may lead to an increase in interest rates. This can decrease national savings and national investment. The effects on the trade surplus can vary depending on other factors.

Step-by-step explanation:

The national savings and investment identity can be written as S + (M-X) + (T - G) = I, where S represents national savings, M represents imports, X represents exports, T represents government revenue, G represents government spending, and I represents national investment.

(1) In the given situation, the trade surplus can be calculated by subtracting imports (M) from exports (X).

Since the values of M and X are not provided, we cannot determine the trade surplus.

(2) If the government expands its spending without raising taxes by borrowing from the public, it will increase the demand for financial capital.

This increased demand may lead to an increase in interest rates as borrowers compete for the available funds.

(3) If the government expands its spending without raising taxes by borrowing from the public, it is likely to decrease national savings as the government is not providing savings.

This decrease in savings may lead to a decrease in national investment as funds are diverted to finance government spending.

The effect on the trade surplus cannot be determined without information about the values of imports and exports.

(4) If the government does not borrow from the public and instead directly borrows from the central bank, it may increase the money supply in the economy.

This increase in the money supply can lead to inflation and higher interest rates.

The effects on national savings, national investment, and trade surplus will depend on various factors and cannot be determined without more information.