EBK PRINCIPLES OF MACROECONOMICS
EBK PRINCIPLES OF MACROECONOMICS
13th Edition
ISBN: 9780135196984
Author: Oster
Publisher: VST
Question
Book Icon
Chapter 9, Problem 1.1P
To determine

Saving and investment.

Expert Solution & Answer
Check Mark

Explanation of Solution

Saving is that part of annual disposable income which is used by a consumer to be spent for future consumption. It can be formulized as [S=(YT)C]. Investment is the value of planned plant purchases, equipment purchases and inventories purchase by business firms. Equilibrium occurs at the point when the Income equal to Aggregate expenditure which equals the sum of consumption, government spending and investment (Y=AE=C+I+G) which can only occur if the leakages from circular flow (Savings (S) and Taxes (T)) are exactly matched by injections of demand (Investment (I) and Government spending (G)) that is, (S+T=I+G). If the saving is greater than taxes and investment equals government spending, then, (S+T>I+G)

If leakages surpass injections, the aggregate expenditure would be lower than aggregate output (C+S+TY>C+I+G) and as a result inventories will increase and the income (Y) will decline. Thus it will experience a recession.

If injections surpass leakages (G>T and S=I, S+T<I+G), the aggregate expenditure would be higher than aggregate output and as a result inventories will decrease and the income (Y) will increase.

Economics Concept Introduction

Saving: Saving is an income that is used by a consumer to spend for future consumption.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
1. Imagine a society that produces military goods and consumer goods, which we'll call "guns" and "butter." a. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape. b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient. c. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose. d. Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger "peace dividend," measured by the increase in butter production? Explain.
A health study tracked a group of persons for five years. At the beginning of the study, 20%were classified as heavy smokers, 30% as light smokers, and 50% as nonsmokers. Resultsof the study showed that light smokers were twice as likely as nonsmokers to die duringthe five-year study, but only half as likely as heavy smokers.A randomly selected participant from the study died during the five-year period. Calculatethe probability that the participant was a heavy smoker
Consider two assets with the following returns: State Prob. of state R₁ R2 1 23 13 25% 5% 2 -10% 1% Compute the optimal portfolio for an investor having a Bernoulli utility of net returns u(r) = 2√√r+ 10. Compute the certainty equivalent of the optimal portfolio. Do the results change if short-selling is not allowed? If so, how?
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education