Question

You observe a closed economy that has a government deficit and positive investment. Which of the following is correct? a. Private and public saving are both positive. b. Private saving is positive; public saving is negative. c. Private saving is negative; public saving is positive. d. Both private saving and public saving are negative.

Answer 1

In a closed economy with a government deficit and positive investment, private saving must be positive to offset the public deficit. Therefore, the correct answer is that private saving is positive; public saving is negative.

Step-by-step explanation:

When examining a closed economy with a government deficit and positive investment, we can use the national saving and investment identity as a fundamental equation:

Private investment = Private savings + Public savings + Trade deficit, which simplifies to I = S + (T-G) + (M-X).

In the scenario provided, the government is running a deficit, which means public savings (T – G) is negative. Given the statement that there is positive investment (I) and the economy is closed (meaning trade deficit is zero), we have to determine the state of private and public saving. Since the economy is closed (M-X) equals zero, and with public savings being negative (T – G < 0), in order for I to be positive, private savings must be positive to offset the public deficit.

Therefore, private saving is positive to compensate for the government's negative saving. The correct answer to the given options is b. Private saving is positive; public saving is negative.

Answer 2

In a macroeconomic scenarion in which a country has a closed economy that has a government deficit and positive investment.

b. Private saving is positive; public saving is negative.

Step-by-step explanation:

Private intervention would be positive in a scenario with a closed economy. Because even though the economy is closed it would be open to private local investors and if they don't obtain profit out of it, they would stop financing the economy to make it grow. however, public savings would be negative because the deficit is the loss of an inefficient public investment sector.