In a closed economy, private saving, , is equal toA) I - (G - T).B) I + (G - T).C) I + (G + T).D) I - (G + T).E) I + (G - T) + C.
Question
In a closed economy, private saving, , is equal toA) I - (G - T).B) I + (G - T).C) I + (G + T).D) I - (G + T).E) I + (G - T) + C.
Solution
In a closed economy, the equation for private saving is S = Y - T - C, where:
- S is private saving
- Y is national income
- T is taxes
- C is consumption
Also, in a closed economy, the national income Y is equal to the sum of consumption (C), investment (I), and government purchases (G). So, we can write Y = C + I + G.
Substituting the second equation into the first, we get S = (C + I + G) - T - C.
Simplifying this, we get S = I + (G - T).
So, the correct answer is B) I + (G - T).
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