Question

In examining the national income accounts of the closed economy of Nepotocracy you see that this year it had taxes of $100 billion, transfers of $20 billion, and government purchases of goods and services of $70 billion. You also notice that last year it had private saving of $70 billion and investment of $50 billion. In which year did Nepotocracy have a budget deficit of $20 billion? A. this year but not last year B. last year but not this year C. neither this year nor last year D. this year and last year

Answer 1

Answer: B. last year but not this year

Explanation:

Last Year

Private savings + Public savings = Investment

70 + Public = 50

Public saving = 50 - 70

= -$20 billion

Public saving refers to a budget surplus because it means that the Government gets to save the amount of its revenue that it did not spend.

If Public saving is negative then there was a BUDGET DEFICIT.

This year

Budget surplus (deficit) = Government Revenue - Expenditure and transfer payments

= 100 - 70 - 20

= $10 billion

This year has a budget surplus.