Question

1) Use the national income identity (S-1) = (G + TR - TA) + (X-M) to answer the following questions as true, false or uncertain and justify your answer. a). If the budget deficit is positive, imports are likely to increase more than exports. (8 points) b) If the budget deficit decreased by $15 billion, private domestic saving decreased by $20 billion, exports increased by $10 billion, and imports increased by $15 billion. Domestic investment must have increased by $30 billion. (8 points) c) If imports are larger than exports then investment must fall relative to savings. (8 points)

Answer 1

- Answer :1) National income identity s-I=(G+TR-TA) (X-M) a) If budget deficit is positive i-e. (G+TR-TA) is positive then (X-M) has to be negative. This will happen if m>x . This means imports has to be more than exports. Hence the statement is true. . b) (G+TR-TA) decreases by $15 billion, putting all changes in the identity, -20-I = -15+ (-10-15) => 1 =- 20+15+25 =+20. Thus domestic investment must be increased by $20 billion. Hence, the statement is false. c) of max the (X-M) is negative. (S-I) has to decrease. Thus investment has to rise relative to savings. Hence the statement is false.