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 and last year
B)this year but not last year
C)last year but not this year
D)neither this year nor last year

Question

Quizplus · Accepted Answer

A budget deficit occurs when government spending exceeds government revenue. To determine if Nepotocracy had a budget deficit of $20 billion, we need to look at the difference between government revenue and spending. This year, government revenue was $120 billion (taxes of $100 billion plus transfers of $20 billion) and government spending was $70 billion, resulting in a budget surplus of $50 billion. Last year, government revenue was not given, but we do know that private saving ($70 billion) plus investment ($50 billion) equals a total of $120 billion, which could be interpreted as government revenue in a closed economy. Government spending last year was also $70 billion, resulting in a balanced budget.

Therefore, the only year that Nepotocracy had a budget deficit of $20 billion is not this year (since there was a budget surplus) but last year, when government revenue would have been $120 billion and government spending was $140 billion (private saving + investment + transfers - taxes - government purchases = $70 billion + $50 billion + $20 billion - unknown + $70 billion).

In Examining the National Income Accounts of the Closed Economy