For the Kingdom of Wakanda, which is a closed economy, total output is equal to $30...
For the Kingdom of Wakanda, which is a closed economy, total output is equal to $30 billion and consumption equals $15 billion. The Wakandan government spends $5 billion and has a budget surplus of $1 billion.
1. Find government saving, taxes, private saving and national saving. Please show clearly how you calculated your final answers, and box/circle your final answers (in billions of dollars) with proper labels (e.g. T = $x billion ).
2. Suppose now the Wakandan government cuts taxes by $1 billion. Assume that total output, initial consumption, and government spending are as specified previously. Determine the new values of taxes, consumption, government saving, private saving, and national saving if Wakandan consumers save 1/2 of the tax cut and spend the other 1/2.
Homework Answers
1. Budget surplus implies tax revenue is grater than the government expenditure.
Budget deficit = Tax - Government expenditure.
$1 billion = Tax - $5 billion.
Tax = $1 billion + $5 billion.
Tax = $6 billion.
Government saving = Tax - Government expenditure.
Government saving = $6 billion - $5 billion
Government saving = $1 billion.
Private saving= GDP - Consumption - Tax
Private savings = $30 billion - $15 billion - $6 billion.
Private savings = $9 billion.
National Saving = Government saving + Private Savings
National Saving = $1 billion + $9 billion.
National Saving = $10 billion
(2) Initial level of tax = $6 billion.
Government cut taxes by $1 billion.
New level of tax = $6 billion - $1 billion
New level of tax = $5 billion
Wakandian consumers save 1/2 of the tax cut and spend other 1/2.
It means consumption will increase by $0.5 billion (i.e., 1/2 of the $1 billion).
Initial level of consumption = $15 billion.
New level of consumption = $15 billion + $0.5 billion.
New level of consumption = $15.5 billion.
New level of government saving = New level of tax - Government expenditure.
New level of government saving = $5 billion - $5 billion.
New level of government saving = $0 billion.
New level of private saving = GDP - New consumption - New Taxes.
New level of private saving =$30 billion - $15.5 billion - $5 billion.
New level of private saving =$9.5 billion
New national saving = New level of government spending + New level of private saving.
New national saving = $0 billion + $9.5 billion
New natinal saving= $9.5 billion
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