Question

Which of the following statements accurately describe the effect of the increase in government borrowing?

a. National saving decreases by less than $20 billion.
b. Investment increases by less than $20 billion.
c. Public saving decreases by exactly $20 billion.
d. Private saving increases by less than $20 billion.

Answer 1

An increase in government borrowing by $20 billion would mean that public saving decreases by exactly $20 billion, while private domestic savings and investment would be affected based on the overall economic conditions and the interest rate connection.

Step-by-step explanation:

The effect of an increase in government borrowing can have various impacts on an economy. To determine which statement accurately describes the outcome of such an event, consider the relationship between government borrowing, savings, and investment.

Public saving decreases when the government borrows because it is spending more than it receives in taxes, leading to a deficit. If there is an increase in government borrowing by exactly $20 billion, then public saving decreases by exactly that amount, assuming all else equal. Private domestic savings might need to adjust to keep the saving-investment balance, as increased government borrowing could potentially crowd out private investment by raising interest rates. The connection between government borrowing and its potential effects on private savings and investment is crucial in understanding the Interest Rate Connection and the overall function of economic equilibrium.

The actual changes to national savings, private savings, and investment depend on various factors including foreign financial investment and the overall economic climate, as evidenced by historical data from periods like the mid-1980s and the Great Recession.

Answer 2

d. Private saving increases by less than $20 billion.

Step-by-step explanation:

Because the interest rate has increased, investment and national saving decline and private saving increases. The increase in government borrowing reduces public saving. From the figure you can see that total loanable funds (and thus both investment and national saving) decline by less than $20 billion, while public saving declines by $20 billion and private saving rises by less than $20 billion.

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