Sales and Investment (CH.8)

Question 1

What is the difference between a closed an open economy?

Answer 1

There is no international trade in closed economies so
in open economy, y = C + I + G + NX
in closed economy y = C + I + G

Question 2

Define National Saving and what is the formula for it in an open and closed economy?

Answer 2

the total income in the economy that remains after paying for consumption and government purchases.
In closed economy S = Y- C - G
In open economy S = Y- C - G - NX

Question 3

What is the classical identity formula?

Answer 3

let taxes = T
S = (Y- C -T) + (T-G)

Question 4

Define Private Savings and what is the formula?

Answer 4

the total income that households have left after paying for taxes and consumption
PS = Y - C - T

Question 5

Define Public Savings/ Government Budget and what is the formula?

Answer 5

the tax revenue that the government has left after paying for its spending
GB = T - G

S = PS + GB = I

Question 6

When is there a budget surplus? Deficit? Balance?

Answer 6

budget surplus T > G or GB > 0
balanced budget T = G GB = 0
budget deficit T < G GB < 0

Question 7

Define Crowding Out

Answer 7

decrease in investment that results from government borrowing

Question 8

What are the characteristics of a market for loanable funds?

Answer 8

supply - savings are the source of supply, as interest rate (r) increases, savings increases
demand - investment is the source of demand, as r increases I decreases
equilibrium where S = D